6 Profile Model Assume the project profile model shown in Fi

6. Profile Model. Assume the project profile model shown in Figure 3.9. Define the efficient frontier. The dotted lines represent the minimum return and the maximum risk that the company will accept. Which projects would be suitable for retaining and which should be dropped from the company?s portfolio? Why? FIGURE 3.9 Project Profile Model (Problem 6)

Solution

The efficient frontier lies on the point B and E lies on the efficient frontier.

B and E should be retained and F and C should be dropped out. A and B cannot be selected since they are out of the minimum acceptable risk and return range.

B and E should be retained because they are giving the higher return on the same amount of risk, similary F and C are offering lower return for higher risk and hence they should be dropped out.