On the capital market line (CML), any risk-return combination beyond the Market Portfolio (m) is obtained by ____.
A) lending money
B) borrowing money
C) reducing risk
D) investing in index funds

Question

Quizplus · Accepted Answer

Any risk-return combination beyond the Market Portfolio (m) can only be obtained by borrowing money at the risk-free rate, which is represented by the point where the Capital Market Line intersects the vertical axis. This is because the efficient frontier (EF) is tangent to the CML at point m, implying that the return earned by the Market Portfolio (m) is greater than the risk-free rate. Thus, an investor can increase their return by borrowing funds at the risk-free rate and investing in a portfolio that lies on the efficient frontier to the right of the Market Portfolio. Therefore, choice B (borrowing money) is the correct answer.

On the Capital Market Line (CML), Any Risk-Return Combination Beyond