If equal risk is added moving along the envelope curve containing the best possible combinations the return will
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 moving from left to right, with increasing returns and increasing risk. If equal risk is added, the return will increase but at a decreasing rate, because the best possible combinations with slightly higher return and slightly higher risk are closer to the upper limit of the envelope curve, where the marginal return for each additional unit of risk decreases. Therefore, the answer is D, increase at a decreasing rate.

If Equal Risk Is Added Moving Along the Envelope Curve