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2. Draw a line diagram illustrating the risk-return frontier. State the axiom that follows from the upward slope of the line. Why is the line called a frontier? What is the implication of the risk-return frontier flattening out as it moves from left to right?

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Answer #1

The axiom that follows upward slppe of line in diagrams below as A. Which indicates the return is high and standard deviation is high as well at this point and is less likely to get solvent as compared to B which has lower return and lower standard deviation.

PAGE NO. DATE: expecte stondond : ation

The risk free return flattens out as we move from left to right because standard deviation becomes higher and which means data is spread across various assets of banks and hence denotes reliability of bank. Also from left to right risk to returns gets highest and arrives at threshold after which it cannot go further as we see in law of diminishing returns. Hence the curve flattens out.

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