Which statement best describes the efficient frontier in portfolio theory?

• A. The set of portfolios with minimum risk for any return
• B. The set of portfolios that offer the highest expected return for a given level of risk
• C. The set of all possible portfolios
• D. The single portfolio with maximum Sharpe ratio

Answer: (B)

The efficient frontier represents the best possible trade-off between risk and return in mean-variance optimization. For each level of risk (volatility), you can’t find a portfolio that offers a higher expected return without increasing risk; equivalently, for each target return, you can’t find a portfolio with lower risk. That description matches the idea of the frontier being the set of portfolios that offer the highest expected return for a given level of risk. In practice, risk is usually measured by standard deviation and returns by expected value; portfolios not on the frontier are suboptimal because they either earn less return for the same risk or involve more risk for the same return.