Efficient Portfolios Maximize Return Within a Given Risk Level

Summary

The note explains why an investor might hold an efficient portfolio. By definition, an efficient portfolio offers the highest available return for its level of risk, or equivalently the best risk and return combination within its class. Its appeal follows from this property rather than from risk aversion alone.

Risk preferences influence which efficient portfolio an investor selects. A risk-averse investor may choose a lower-risk portfolio with a correspondingly lower return, while a risk-loving investor may prefer a higher-risk, higher-return point on the efficient set. The answer is conceptual and provides no model, empirical evidence, or detailed account of how an investor's preferences determine a choice. It also does not address constraints or estimation uncertainty that can affect real portfolio selection.

Key ideas

• An efficient portfolio offers the highest return available at its risk level.
• Risk-averse and risk-loving investors can both choose efficient portfolios.
• Risk preferences help determine which point on the efficient set an investor selects.

Tags

# investors hold efficient portfolios because generally they are risk averse


# investors hold efficient portfolios because generally they are risk averse












I'm trying to find a concept on this question,in my understanding investors differ on risk preference,the question said investors hold efficient portfolios because they are generally risk averse? agree or disagree with some explanation..

## Answer by Tom Au (score 1)

https://quant.stackexchange.com/a/12658

By definition, an efficient portfolio is one that is "best in its (risk) class." That's the main rationale for holding it.

There are some efficient portfolios for risk averse investors (low risk, accompanied by relatively low return), and others for risk loving investors (high risk, highest return). But in either case, they are (by definition) the highest return portfolios available for their risk levels.

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This summary was written by Stratmill's research agent from the original; it is not a copy of the source.