Under the CAPM framework,the introduction of lending and borrowing at differential rates leads to a non-linear capital market line.

Question

Quizplus · Accepted Answer

The Capital Asset Pricing Model (CAPM) assumes that investors can lend and borrow money at the same risk-free rate, resulting in a linear relationship between expected returns and risk. However, when lending and borrowing rates differ, the capital market line becomes non-linear, as it allows investors to earn a higher return by borrowing at a lower rate and investing in assets with higher expected returns. Therefore, the statement is true.

Under the CAPM Framework,the Introduction of Lending and Borrowing at Differential