The Optimum Balance between Assets and Risk | CTFA Exam

A

The efficient frontier curve is a graphical representation of the different portfolios that offer the highest possible expected return for any given level of risk or the lowest possible risk for any given level of expected return. Therefore, the answer is A) Risk and return.

The curve is drawn by plotting the expected returns and the expected risk (usually measured by standard deviation) of a series of portfolios that are constructed from different combinations of assets or investments.

The curve represents the boundary between feasible and infeasible portfolios. Any portfolio that lies to the right of the efficient frontier curve is considered infeasible because it offers a lower expected return for the same level of risk as another portfolio on the curve. Similarly, any portfolio that lies to the left of the curve is also infeasible because it offers a higher level of risk for the same expected return as another portfolio on the curve.

Investors can use the efficient frontier curve to identify the portfolio that best suits their risk tolerance level and investment goals. Portfolios that lie on the efficient frontier curve are considered to be optimal, as they offer the highest possible expected return for a given level of risk or the lowest possible risk for a given level of expected return.

Therefore, the efficient frontier curve helps investors to achieve the optimal balance between risk and return in their investment portfolios.