Final answer:
The efficient frontier of risky assets is the set of portfolios that offer the highest return for a given level of risk, as per modern portfolio theory. It illustrates the tradeoff between expected return and risk, helping investors decide on optimal investment strategies based on personal preferences and time frames.
Step-by-step explanation:
The efficient frontier of risky assets is A. This concept is a fundamental part of modern portfolio theory and represents an ideal selection of investment portfolios that provides the best possible expected return for a defined level of risk.
The efficient frontier is a graphical representation where risk is plotted on the x-axis and return on the y-axis, illustrating the highest expected return that one can achieve for a given level of risk.
The household investment choices, such as bank accounts, bonds, and stocks, demonstrate the inherent tradeoff between expected return and degree of risk involved. For instance, bank accounts, with very low risk, yield lower returns, while stocks, with higher risk, offer the possibility for greater returns.
The fact that a higher average return compensates for a higher degree of risk is crucial in understanding why the efficient frontier is sought after by investors.
Considering time frames is essential when examining risk and return, as different investments may yield varying results over short-term versus long-term periods. Investor personal preferences also play a crucial role in deciding whether to invest in safe, low-return assets or riskier, high-return ones.