Question

On the efficient frontier of the One Fund Theorem when shorting is not allowed, what is a key characteristic?

a) Diversification is Not Achievable
b) All Assets Have the Same Return
c) Maximum Return for a Given Level of Risk
d) Minimal Risk for a Given Level of Return

Answer 1

The key characteristic of the efficient frontier under the One Fund Theorem without shorting is achieving maximum return for a given level of risk, which maintains the optimal return-to-risk ratio through diversification.

Step-by-step explanation:

The question asks about a characteristic of the efficient frontier in the context of the One Fund Theorem when shorting is not allowed.

The key characteristic is c) Maximum Return for a Given Level of Risk. This concept comes from modern portfolio theory and signifies that an investor can achieve the highest possible return for a specified level of risk by selecting an appropriate combination of assets that lie on the efficient frontier. Diversification still plays a role in constructing these portfolios as it helps in optimizing the return-to-risk ratio.