When risk-free investing and borrowing are introduced, the following changes occur:
A) The new efficient frontier shifts in a parallel fashion downward to the previous efficient frontier.
B) The new efficient frontier shifts in a parallel fashion upward to the previous efficient frontier.
C) The new efficient frontier is no longer a curve as it was in the Markowitz analysis but is now linear.
D) The efficient frontier remains the same.

Question

Quizplus · Accepted Answer

When risk-free investing and borrowing are introduced, the efficient frontier becomes a straight line, known as the Capital Market Line (CML), which is tangent to the original efficient frontier. This line represents the set of portfolios that optimally combine risk and return, including the risk-free asset.

When Risk-Free Investing and Borrowing Are Introduced, the Following Changes