Question of the Week

Which of the following is the most true regarding the type of assets found along the efficient frontier?

a) Exclusively portfolios consisting of several different assets.
b) Portfolios consisting of several different imperfectly correlated assets, as well as individual securities at certain points.
c) Portfolios consisting of several different perfectly correlated assets, as well as individual securities at certain points.
d) Individual securities, with some portfolios consisting of imperfectly correlated assets.

Answer:

The correct answer is b.

The efficient frontier is comprised mainly of portfolios that contain several imperfectly correlated assets. In some cases, individual securities can be located on the end points of the curve.

The efficient frontier would not be mainly comprised of portfolios containing perfectly correlated assets as these portfolios are not benefiting from diversification.