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.

Question

Quizplus · Accepted Answer

The capital market line (CML) represents the combination of portfolios that optimally combine risk and return. It shows that investors will choose to invest in a mix of the riskless asset and the tangency portfolio, which is the portfolio on the efficient frontier that is tangent to the CML. This reflects the idea that investors can adjust their risk and return by changing the mix between the riskless asset and the tangency portfolio.

The Combination of the Efficient Set of Portfolios with a Riskless