What is the significance of what was called the "Optimal Portfolio?"

What is the importance of this combination, vs. investing in any of the portfolios along the "feasible" curve from B to S (or 1 to 2)?

Expert Solution

1) Optimal Portfolio:

Assumption is that Investors focus on their efforts to minimize the risk while striving for the highest possible return.

Optimal Portfolio is a portfolio with highest risk to return combination for the given investor's tolerance to risk. The significance of optimal portfolio is that for the same risk investor can decide to choose a portfolio with higher return.

2) Importance of optimal portfolio combination:

Points on the curve above the minimum variance portfolio is called the optimal portfolios, for the same risk these portfolios yield higher returns. And this curve is called the Efficient Frontier.

Portfolio's below this curve are not efficient because for the same risk one can get higher returns.

jeff jeffy answered 2 years ago

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