1. Explain how a given investor chooses an optimal portfolio. Will this choice always be a diversified portfolio, or could it be a single asset? Explain your answer.
2. Assume that you and a business associate develop an efficient frontier for a set of investments. Why might the two of you select different portfolios on the frontier?
3. Draw a hypothetical graph of an efficient frontier of U.S. common stocks. On the same graph, draw an efficient frontier assuming the inclusion of U.S. bonds as well. Finally, on the same graph, draw an efficient frontier that includes U.S. common stocks, U.S. bonds, and stocks and bonds from around the world. Discuss the differences in these frontiers.