curve means increasing the proportion in stocks and correspondingly re-
ducing the proportion in bonds. As stocks are added to the all-bond
portfolio, expected returns increase and risk decreases, a very desirable
combination for investors. But after the minimum risk point is reached,
increasing stocks will increase the return of the portfolio but only with
extra risk.
The slope of any point on the efficient frontier indicates the risk-re-
turn trade-off for that allocation. By finding the points on the longer-
term efficient frontiers that have a slope equal to the slope on the
one-year frontier, one can determine the allocations that represent the
same risk-return trade-offs for all holding periods.CHAPTER 2 Risk, Return, and Portfolio Allocation 33
FIGURE 2–5
Risk-Return Trade-Offs for Various Holding Periods, 1802 through December 2006