Answered: Distinguish between positioning on the…

Practical Management Science

6th Edition

ISBN:9781337406659

Author:WINSTON, Wayne L.

Publisher:WINSTON, Wayne L.

Chapter2: Introduction To Spreadsheet Modeling

Section: Chapter Questions

Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...

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Distinguish between positioning on the efficient frontier and the increasing operations effectiveness by extending the frontier?

Expert Solution

Step 1

The efficient frontier can be defined as the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the defined rate of return.

Step 2

The efficient frontier represents portfolios that maximize returns for the risk assumed. Returns are dependent on the investment combinations that make up the portfolio.

Efficient frontier comprises investment portfolios that offer the highest expected return for a specific level of risk.
Returns are dependent on the investment combinations that make up the portfolio.
The standard deviation of a security is synonymous with risk. Lower covariance between portfolio securities results in lower portfolio standard deviation.
Successful optimization of the return versus risk paradigm should place a portfolio along the efficient frontier line.

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