Question

What trade-off does investing entail according to Modern Portfolio Theory?

a.

Between risk and expected return

b.

Between short-term and long-term investments

c.

Between liquidity and solvency

d.

Between asset classes and industry sectors

Posted under IC 14 Regulations of Insurance Business

Answer: (a).Between risk and expected return Explanation:According to Modern Portfolio Theory (MPT), investing involves a trade-off between risk and expected return. Assets with higher expected returns typically carry higher levels of risk, and investors must balance their risk tolerance with their desire for potential returns when constructing investment portfolios. MPT aims to optimize this trade-off by diversifying portfolios across assets with different risk-return profiles.

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