The following diagram depicts the Portfolio Frontier. What portion of this graph denoted as portion A, B and C, represents the Efficient Frontier?

Question

BlackTom AI · Accepted Answer

The efficient frontier is the set of portfolios that, for each level of risk, provide the highest expected return (equivalently, for each return level, the lowest risk). In mean–variance space this is the upper-right portion of the feasible frontier lying above the global minimum-variance portfolio.

1) Relevant concepts
- Portfolio frontier (orange curve) shows all achievable combinations of expected return (vertical axis) and portfolio risk σP (horizontal axis).
- Global minimum-variance portfolio is the point on the curve with the smallest σP.
- Efficient frontier = the segment of the frontier above (to the right of) that minimum-variance point, because those points are not dominated (no other portfolio has both higher return and lower risk).

2) Step-by-step reasoning
- Locate the minimum-variance point: it is the left-most dip of the orange curve. That point separates the lower arc from the upper arc.
- For any given risk value on the lower arc (left/lower branch), there exists a portfolio on the upper arc with the same risk but a higher expected return. Hence the lower arc is inefficient (dominated).
- The upper arc (the part rising to the right from the minimum-variance point) gives the maximum expected return for each level of risk and therefore is the efficient frontier.

3) Calculations
- No numeric calculation is needed; this is a graphical definition. If one were to compare two portfolios with same σP, the one on the upper arc has larger E(RP), demonstrating dominance.

4) Why B is correct
- The diagram labels the upward-sloping, right-hand part of the curve as B. That is exactly the upper arc above the minimum-variance point, so B represents portfolios that are undominated and hence efficient.

5) Why the other options are incorrect
- A corresponds to the lower/left arc below the minimum-variance point: dominated and therefore inefficient.
- C appears to denote a full vertical span (or the vertical axis region) and includes dominated portfolios; it is not the selective upper frontier.
- “All answers listed are correct” is false because A and C are not efficient.

Conclusion: The efficient frontier is portion B, which matches the provided correct answer B.

The following diagram depicts the Portfolio Frontier. What portion of this graph denoted as portion A, B and C, represents the Efficient Frontier?Single choice

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