The correct answer is: C. highest utility.
A portfolio’s utility is a measure of its desirability to an investor. It is a function of the portfolio’s expected return and risk. The optimal portfolio is the one that maximizes the investor’s utility.
A portfolio with the lowest risk is not necessarily the optimal portfolio. An investor may be willing to accept a higher level of risk in order to achieve a higher expected return.
A portfolio with the highest risk is not necessarily the optimal portfolio either. An investor may be unwilling to accept a high level of risk, even if it means a higher expected return.
The optimal portfolio is the one that strikes the right balance between risk and return for the investor. It is the portfolio that maximizes the investor’s utility.
Here is a brief explanation of each option:
- A. lowest risk. A portfolio with the lowest risk is not necessarily the optimal portfolio. An investor may be willing to accept a higher level of risk in order to achieve a higher expected return.
- B. highest risk. A portfolio with the highest risk is not necessarily the optimal portfolio either. An investor may be unwilling to accept a high level of risk, even if it means a higher expected return.
- C. highest utility. The optimal portfolio is the one that maximizes the investor’s utility. It is the portfolio that strikes the right balance between risk and return for the investor.
- D. least investment. The optimal portfolio is not necessarily the portfolio with the least investment. An investor may be willing to invest more money in order to achieve a higher expected return.