20. Efficient portfolios (S7.4) Figure 7.17 purports to show the range of attainable combinations of expected return and standard deviation.

a. Which diagram is incorrectly drawn and why?

b. Which is the efficient set of portfolios?

c. If rf is the rate of interest, mark with an X the optimal stock portfolio.

r B

C A

r B

C r A f rf

(a) (b)

 

◗ FIGURE 7.17 See Problem 21 A B C D E F G H Expected return (r), (%) 10 12.5 15 16 17 18 18 20 Standard deviation (σ), (%) 23 21 25 29 29 32 35 45