EFFICIENT DIVERSIFICATION WITH MANY RISKY ASSETS

Extending Concepts to All Securities
-The optimal combinations result in lowest level of risk for a given return
-The optimal trade-off is described as the efficient frontier
-These portfolios are dominant

Portfolios Constructed from Three Stocks A, B and C

The Efficient Frontier of Risky Assets and Individual Assets

This graph shows nothing more than an optimal choice.
Given the risk, you will pick the point along the efficient frontier which gives the maximized E(r).