Use the following information to answer the question(s)below. Suppose that all stocks can be grouped into two mutually exclusive portfolios (with each stock appearing in only one portfolio): growth stocks and value stocks.Assume that these two portfolios are equal in size (market value),the correlation of their returns is equal to 0.6,and the portfolios have the following characteristics: The risk free rate is 3.5%. -Which of the following statements is FALSE? A)A combination of portfolios on the efficient frontier of risky investments is also on the efficient frontier of risky investments. B)The conclusion of the CAPM that investors should hold the market portfolio combined with the risk-free investment depends on the quality of an investor's information. C)The SML holds with some rate r* between r_s and r_b in place of r_f,where r* depends on the proportion of savers and borrowers in the economy. D)In reality,investors have different information and spend varying amounts of effort on research for assorted stocks.

Question

Quizplus · Accepted Answer

The conclusion of the CAPM (Capital Asset Pricing Model) that investors should hold the market portfolio combined with the risk-free investment is based on the assumptions of the model, which include perfect information. It does not depend on the quality of an investor's information, as the model assumes all investors have access to the same information and thus will arrive at the same market portfolio.

Use the Following Information to Answer the Question(s)below