The optimal risky portfolio can be identified by finding:
I. The minimum-variance point on the efficient frontier
II. The maximum-return point on the efficient frontier and the minimum-variance point on the efficient frontier
III. The tangency point of the capital market line and the efficient frontier
IV. The line with the steepest slope that connects the risk-free rate to the efficient frontier
A) I and II only
B) II and III only
C) III and IV only
D) I and IV only

Question

Quizplus · Accepted Answer

The optimal risky portfolio is identified by the tangency point of the capital market line and the efficient frontier, which represents the point of highest return for a given level of risk. This point is also the point where the market portfolio, a portfolio of all risky assets in the market, is located. Therefore, only III (tangency point of the capital market line and the efficient frontier) and IV (the line with the steepest slope that connects the risk-free rate to the efficient frontier) are relevant in identifying the optimal risky portfolio, and the correct answer is C.

The Optimal Risky Portfolio Can Be Identified by Finding