The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in:
A) the capital market line which shows that all investors will only invest in the riskless asset.
B) the capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
C) the security market line which shows that all investors will invest in the riskless asset only.
D) the security market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
E) None of these.

Question

Quizplus · Accepted Answer

The capital market line shows the relationship between the expected return and risk of a portfolio. It is a straight line that connects the risk-free rate to the tangency portfolio, which is the portfolio that has the highest expected return for a given level of risk. All investors will invest in a combination of the riskless asset and the tangency portfolio, because this will give them the highest expected return for their level of risk.

The Combination of the Efficient Set of Portfolios with a Riskless