Optimal Portfolio

C

C is wrong because it does not specify the fact that risk must also be considered.

The optimal portfolio refers to the portfolio that provides the highest level of satisfaction or utility for a given investor. It is constructed by combining different assets in a way that maximizes the investor's preferences and objectives, such as maximizing returns while minimizing risk. However, among the given options, one statement is not true regarding the optimal portfolio. Let's evaluate each statement to identify the incorrect one:

A. The statement says that the optimal portfolio is the efficient portfolio that has the highest utility for a given investor. This statement is generally true. 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 level of return. It lies on the efficient frontier, which represents the set of portfolios that offer the highest return for a given level of risk or the lowest risk for a given level of return. The efficient portfolio that provides the highest utility for the investor depends on their preferences and risk tolerance.

B. The statement suggests that the optimal portfolio lies at the point of tangency between the efficient frontier and the investor's indifference curve. This statement is also true. An indifference curve represents the combinations of risk and return that provide the investor with the same level of satisfaction or utility. The optimal portfolio is the one that maximizes the investor's utility and is tangent to the highest indifference curve that touches the efficient frontier. This point represents the optimal trade-off between risk and return for the investor.

C. The statement claims that the optimal portfolio is the portfolio that gives the investor the maximum level of return. This statement is not always true. While return is an important consideration, the optimal portfolio is not solely determined by maximizing return. It is about achieving the highest level of utility, which involves considering the investor's risk tolerance, preferences, and objectives. The optimal portfolio aims to strike a balance between risk and return that aligns with the investor's specific requirements.

D. The statement states that the optimal portfolio will be fully diversified. This statement is generally true. Diversification is a crucial aspect of portfolio management as it helps to reduce unsystematic or company-specific risk. By spreading investments across different asset classes, sectors, and geographic regions, the investor can reduce the impact of any individual investment's poor performance on the overall portfolio. A well-diversified portfolio helps to enhance risk-adjusted returns and minimize exposure to idiosyncratic risks.

Therefore, the incorrect statement regarding the optimal portfolio is C. It is not necessarily the portfolio that gives the investor the maximum level of return. Instead, the optimal portfolio is determined by a combination of factors, including the investor's risk tolerance, preferences, and objectives, in addition to the trade-off between risk and return.