Refer to the graph.Each labeled point represents a different asset.For which of these assets would we not expect arbitrage to change the average expected rate of return?
A)E only
B)D, E, and F
C)E, G, and H
D)D, E, F, G, and H

Question

Refer to the graph.Each labeled point represents a different asset.For which of these assets would we not expect arbitrage to change the average expected rate of return?
A)E only 
B)D, E, and F 
C)E, G, and H 
D)D, E, F, G, and H

Quizplus · Accepted Answer

Arbitrage should not affect the expected rate of return for assets that lie on the Capital Market Line (CML), which is the line that connects the risk-free asset with the tangency point of the efficient frontier. Asset E lies on the CML, so it is immune to arbitrage (Choice A). Assets G and H also lie on the CML, so they should not be affected by arbitrage (Choice C). However, assets D, F and G are not on the CML, so they are susceptible to arbitrage (Choice B and D).

Refer to the Graph