Chuck Hill, CFA: Efficient Frontier Analysis Statement

A

The correct statement regarding the efficient frontier, as explained by Chuck Hill, CFA, is:

A. The left endpoint of the efficient frontier is represented by the portfolio with the lowest level of risk.

Explanation:

The efficient frontier is a graphical representation of portfolios that offer the highest expected return for a given level of risk or the lowest level of risk for a given expected return. It is a concept used in modern portfolio theory (MPT) to help investors optimize their portfolios by finding the optimal combination of assets that maximize return while minimizing risk.

Statement A states that the left endpoint of the efficient frontier represents the portfolio with the lowest level of risk. This statement is correct. The efficient frontier is a curve that starts from the left endpoint, representing portfolios with the lowest risk. As you move along the efficient frontier to the right, the level of risk increases while also providing higher expected returns.

This means that the portfolios located further to the right on the efficient frontier offer a higher expected return, but at the cost of increased risk. So, statement B is incorrect. Portfolios that are to the right on the efficient frontier do not necessarily dominate portfolios on the left. It depends on the investor's risk preference and the trade-off they are willing to make between risk and return.

Statement C, which states that only efficient assets are on the efficient frontier, is incorrect. The efficient frontier represents portfolios composed of different combinations of assets, not just individual assets. An efficient portfolio is one that offers the highest expected return for a given level of risk or the lowest level of risk for a given expected return. It is constructed by combining assets with different risk and return characteristics to achieve an optimal balance.

In summary, Chuck Hill's correct statement is that the left endpoint of the efficient frontier represents the portfolio with the lowest level of risk (Statement A).