How does an investor earn more than the return generated by the tangency portfolio and still stay on the security market line?
A) Borrow at the risk free rate and invest in the tangency portfolio.
B) Add high risk/return assets to the portfolio.
C) Adjust the weight of stock in the portfolio to include more high return stocks.
D) It cannot be done.

Question

Quizplus · Accepted Answer

By borrowing at the risk-free rate and investing in the tangency portfolio, the investor can increase their return without adding additional risk to their portfolio. This strategy is called leverage and it allows the investor to earn a higher return than the tangency portfolio while still staying on the security market line. However, it's important to note that leverage also increases the investor's risk of loss.

How Does an Investor Earn More Than the Return Generated