Evaluating Portfolio Efficiency in MPT

Hard Portfolio Risk And Return Modern Portfolio Theory

Modern Portfolio Theory (MPT) revolutionized the way investors approach portfolio construction by emphasizing the relationship between risk and return. According to MPT, investors aim to create an 'efficient frontier' of optimal portfolios that offer the highest expected returns for a given level of risk. Consider an investor who is evaluating two portfolios, Portfolio X and Portfolio Y. Portfolio X has a higher expected return with a respective lower standard deviation compared to Portfolio Y. However, Portfolio Y has a higher beta value.

Which of the following statements about these portfolios is most accurate regarding their risk-return profiles under MPT?

Portfolio X is more efficient than Portfolio Y because it offers a higher return for less risk.

Portfolio Y is preferred because it has a higher beta, indicating higher systematic risk which is rewarded in the market.

Both portfolios are equivalent since they lie on the efficient frontier.

Hint

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