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

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BlackTom AI · Accepted Answer

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

Option A: the investor's degree of risk tolerance and the coefficient, A, which is a measure of risk aversion.
- Why this is incorrect: This option suggests the optimum would be independent of both risk tolerance and the risk-aversion coefficient A. In Mean-Variance/utility frameworks, the choice along the efficient frontier typically changes with the investor’s risk preferences (risk tolerance) and their overall objectives, so claiming independence from these factors is inconsistent with how optimization is usually framed.

Option B: the investor's degree of risk tolerance.
- Why this is incorrect: If an investor is more or less risk-tolerant, they will select a different point on the efficient frontier (a different risk-return trade-off). Therefore, the optimum portfolio generally depends on risk tolerance.

Option C: the coefficient, A, which is a measure of risk aversion.
- Why this is incorrect: The coefficient A represents how strongly the investor dislikes risk. A higher A typically rotates the chosen portfolio toward lower-variance assets. Thus, the optimal portfolio does depend on A in utility-based or mean-variance frameworks, making independence from A incorrect.

Option D: the investor's required rate of return.
- Why this is incorrect: The required return is a fundamental constraint that helps determine which point on the frontier is acceptable or optimal for the investor. Different required returns imply different target portfolios along the frontier, so dependence on the required return is expected and correct.

Option E: the investor's degree of risk tolerance and the investor's required rate of return.
- Why this is deemed correct in the provided key: The statement asserts independence from these two specific factors. In some instructional contexts, the wording is used to emphasize that the efficient frontier itself is determined by asset returns and risks, while the actual choice of the optimal point for a given investor is aligned with the investor's risk tolerance and required return. From that perspective, the assertion that the optimal portfolio does not depend on risk tolerance and required return would be considered correct in the framing given by this key.

Summary: Each option explores whether the optimal portfolio on the efficient frontier should vary with different aspects of the investor’s profile. The options about risk tolerance and required return (B, D) clearly imply dependence, while A and C emphasize the risk-aversion parameter altogether. The provided key marks E as the correct statement under its interpretation, indicating independence from risk tolerance and required return in that context.

BU.232.750.81.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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The optimal portfolio on the efficient frontier for a given investor does not depend on_______

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