Answer to Question #193014 in Management for Priyanka

Question

How do you classify a portfolio to be inefficient? Justify your answers using the concept

of efficient frontier along with the different tests for market efficiency.

Answer 1

Portfolios are inefficient when they yield lower returns compared to the amount of risk taken during the investment. Efficient frontiers are portfolios that guarantee the maximum possible returns for every risk level. Diversification of the assets in the portfolio increases returns while it lowers the risk levels of the investment. Graphically, the efficient frontier is a curved line which shows that as risk level increases the level of expected returns decreases.