This brings up the question of how they choose to diversify. There is a theorem that states an investor will choose an optimal portfolio from a set of portfolios that offers maximum expected return for varying levels of risk and offers minimum risk for varying levels of expected return. This set of portfolios is known as the efficient set which is also known as the efficient frontier...
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This set of portfolios is known as the efficient set which is also known as the efficient frontier. To get the efficient set we have to look at the feasible set first. The feasible set is the set of all available portfolios. Due to the nature of the risk vs. return concept there is a point that is the furthest to the left on the risk axis that is also fairly low on the ex...