Question

The individual investor's optimal portfolio is designated by: Group of answer choices

a.None of the above.
b.The point of tangency with the indifference curve and the capital allocation line.
c.The point of the highest reward to variability ratio in the indifference curve.
d.The point of highest reward to variability ratio in the opportunity set.
e.The point of tangency with the opportunity set and the capital allocation line.

Answer 1

The individual investor's optimal portfolio is found at the point where b) the highest achievable indifference curve is tangent to the capital allocation line, which represents the trade-off between risk and return that the investor selects within their opportunity set.

Step-by-step explanation:

The individual investor's optimal portfolio is designated by the point of tangency between the indifference curve and the capital allocation line (CAL).

The indifference curve represents combinations of risk and return that provide the investor with the same level of satisfaction, or utility. The capital allocation line represents the risk-return combinations available to an investor from a portfolio of a risk-free asset and a risky portfolio.

The optimal portfolio is at the point where the investor achieves the highest level of utility, which corresponds to the highest indifference curve that is still within the opportunity set, touching the budget line at just one point of tangency.