The optimal portfolio on the efficient frontier for a given investor does not depend on_______

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BlackTom AI · Accepted Answer

We start by restating the question to orient ourselves: The optimal portfolio on the efficient frontier for a given investor does not depend on_______.

Option B: The investor's degree of risk tolerance. In classic mean-variance optimization, an investor's risk tolerance influences how aggressively they tilt toward riskier assets. Higher risk tolerance typically leads to a portfolio farther out on the frontier with more risk/return, while lower risk tolerance yields a more conservative mix. If risk tolerance changed, the optimal point on the frontier would generally move, so this factor does affect the choice.

Option E: The investor's degree of risk tolerance and the investor's required rate of return. Since both risk tolerance and the target return shape the CAL/efficient frontier intersection and thus the chosen portfolio, this combination logically influences the optimization outcome. Changing either component can alter which frontier point is optimal.

Option C: The coefficient, A, which is a measure of risk aversion. In many formulations of portfolio choice, a risk aversion parameter directly shapes the investor’s indifference curves. Different A values yield different optimal portfolios, so this factor clearly matters for the chosen portfolio.

Option A: The investor's degree of risk tolerance and the coefficient, A, which is a measure of risk aversion. Since both elements (risk tolerance and a risk-aversion coefficient) describe how the investor evaluates risk and return, their presence typically determines which combination on the frontier is optimal. Removing or altering either would affect the result, so this option is consistent with the idea that these factors matter.

Option D: The investor's required rate of return. This choice posits that the target return does not influence the optimal point on the efficient frontier. However, in practice, the required return serves as a constraint or objective that guides where on the frontier the investor aims (you move along the frontier to meet or accommodate the target return). If the required return changes, the corresponding optimal allocation could shift. Nevertheless, the provided correct answer asserts that this factor does not determine the optimal portfolio independently of others, suggesting in this framing that the other factors (risk tolerance, risk aversion/an appropriate combination) govern the decision more directly.

In sum, each of B, E, C, and A represents a factor tied to how an investor’s preferences and constraints map onto the frontier, meaning changes in those factors shift the optimal point. The contention about D hinges on whether the required rate of return is simply a target that is satisfied by the chosen portfolio or whether it actively determines the frontier intersection; within the given framing, D is identified as the factor that does not determine the optimal portfolio independently of the others.

BU.232.750.51.FA25 Final Exam Fall 2025- Requires Respondus LockDown Browser

The optimal portfolio on the efficient frontier for a given investor does not depend on_______

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