The optimal portfolio for a risk-averse investor:
A)cannot be determined
B)occurs at the point of tangency between the highest indifference curve and the highest expected return
C)occurs at the point of tangency between the highest indifference curve and the efficient set of portfolios
D)occurs at the point of tangency between the highest expected return and lowest risk efficient portfolios

Question

Quizplus · Accepted Answer

The efficient set of portfolios represents the set of portfolios that offer the highest return for a given level of risk. The highest indifference curve represents the level of risk that the risk-averse investor is willing to take for a given level of return. Thus, the optimal portfolio for a risk-averse investor occurs at the point where the highest indifference curve is tangent to the efficient set of portfolios. This point is known as the point of tangency between the highest indifference curve and the efficient set of portfolios. Therefore, option C is the correct choice.

The Optimal Portfolio for a Risk-Averse Investor