Questions: Multiple Choice Question What is the shape of the efficient frontier and what does this imply? Downward-sloping; indirect relationship between risk and reward Upward-sloping; indirect relationship between risk and reward Upward-sloping; direct relationship between risk and return Flat; constant relationship between risk and return

The answer is the third one: Upward-sloping; direct relationship between risk and return.

Explanation for each option:

• Downward-sloping; indirect relationship between risk and reward: This is incorrect because a downward-sloping curve would imply that as risk increases, the reward decreases, which is not the case for the efficient frontier.
• Upward-sloping; indirect relationship between risk and reward: This is incorrect because an indirect relationship would imply that as one variable increases, the other decreases, which is not true for the efficient frontier.
• Upward-sloping; direct relationship between risk and return: This is correct because the efficient frontier in modern portfolio theory is typically upward-sloping, indicating that higher levels of risk are associated with higher potential returns.
• Flat; constant relationship between risk and return: This is incorrect because a flat line would imply that risk and return are constant and do not change with each other, which does not represent the efficient frontier.

Summary: The efficient frontier is upward-sloping, indicating a direct relationship between risk and return. This means that as the level of risk increases, the potential return also increases.