Assume your company recently diversified, and in addition to producing its recognized brand of ice cream products, it now also is producing cereal and nutritional products. Assume you have been using

Question

Options

• AEach product line should have its own portfolio to use the Efficient Frontier approach effectively
• BThe best possible portfolios are shown above the portfolio curve
• CThe same expected return from the portfolio may be possible
• DThe new potential portfolio outcomes concerning success criteria can be determined

• A
  2% (1)
• B
  15% (6)
• C
  76% (31)
• D
  7% (3)

Explanation

The Efficient Frontier (borrowed from modern portfolio theory in finance) demonstrates that diversification can allow an investor or portfolio manager to achieve the same expected return at lower risk, or potentially better returns for the same risk level. By adding uncorrelated product lines (ice cream, cereal, nutritional products), the portfolio can be restructured so the same expected return remains achievable through a different, diversified mix of components. Separate Efficient Frontiers per product line (A) defeats the purpose of the tool. The best portfolios lie ON, not above, the frontier curve (B is incorrect). The frontier shows efficient combinations, not just 'new outcomes' in a general sense (D is vague and less precise).

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