Properties of the efficient frontier

The curve shown in the previous plot shows the solution of minimizing the variance under the constraint that the portfolio expected return equals the target return. When the target return is below the minimum variance return, the obtained portfolio is not efficient because a higher return at lower risk can be obtained by investing in the minimum variance portfolio. The optimized portfolios often are also not realistic because they tend to invest large weights in only a few assets. A practical solution to avoid this is to impose weight constraints.

The effect of such a weight constraint is shown in the workspace, where you can see the efficient frontier plots obtained for the DJIA stocks under a maximum 100% weight constraint (black line), a maximum 10% weight constraint (red line) and a maximum 5% weight constraint (blue).

Which of the following statements is false.

Possible answers

Imposing a more strict weight constraint leads to a shift to the right of the efficient frontier.

The portfolios on the dashed lines are not mean-variance efficient.

The observed average return of any risky portfolio is always higher than the risk-free rate.

None of the above.

Exercise

Properties of the efficient frontier

Instructions

Possible answers