What will happen to the return, if equal risk is added moving along the envelope curve containing the best possible combinations?
A) Decrease at an increasing rate.
B) Decrease at a decreasing rate.
C) Increase at an increasing rate.
D) Increase at a decreasing rate.
E) Remain constant.

Question

Quizplus · Accepted Answer

Moving along the envelope curve containing the best possible combinations means increasing the level of risk. As risk is increased, the return will also increase. However, at a certain point, adding more risk will result in diminishing returns, causing the increase in return to slow down (i.e. decrease at a decreasing rate). Therefore, the return will increase at a decreasing rate if equal risk is added along the envelope curve.

What Will Happen to the Return, If Equal Risk Is