Answer: Action 2

## Explanation **B is correct.** The optimal portfolio is on the efficient frontier and is the one that maximizes the slope of the tangent from the origin. At this optimal point, the ratio of expected excess returns to portfolio beta (or marginal VaR) for all stocks in the portfolio is equal. This condition represents the optimal risk-return tradeoff where the marginal contribution to return per unit of marginal risk is equalized across all assets. **A is incorrect** because this action would only minimize the risk of the portfolio but doesn't necessarily achieve the optimal risk-return combination on the efficient frontier. **C is incorrect** because equalizing portfolio betas across all stocks would only minimize risk but doesn't consider the return component needed for optimal portfolio construction. **D is incorrect** because decreasing portfolio standard deviation without changing average excess return doesn't guarantee reaching the optimal portfolio on the efficient frontier; it may simply move the portfolio to a different point on the frontier. **Key Concept:** The optimal portfolio occurs when the ratio of expected excess return to marginal VaR (or beta) is equal for all assets in the portfolio, ensuring that no asset provides a better risk-adjusted return than others at the margin.

Author: LeetQuiz .