Choose the statement below that is not correct.
A) With the addition of risk-free borrowing and lending, the Markowitz efficient frontier is dominated by a new efficient frontier.
B) With the introduction of risk-free borrowing and lending, the efficient frontier will become a straight line.
C) With the introduction of risk-free borrowing and lending, the efficient frontier will be an arc that is higher than the Markowitz arc which had been the efficient frontier.
D) In equilibrium, all risky assets must still be in the market portfolio.

Question

Quizplus · Accepted Answer

The introduction of risk-free borrowing and lending transforms the efficient frontier into a straight line (the Capital Market Line) from the risk-free rate, tangentially touching the Markowitz efficient frontier, rather than forming a higher arc.

Choose the Statement Below That Is Not Correct