With the introduction of risk-free borrowing and lending changes the nature of the original Markowitz efficient frontier by turning the efficient frontier into a straight line.

Question

Quizplus · Accepted Answer

With risk-free borrowing and lending, an investor can borrow or lend at the risk-free rate and invest in the risky asset to achieve a higher return. This new opportunity changes the efficient frontier and turns it into a straight line, called the capital market line, where every combination of the risky asset and the risk-free asset is optimal. Therefore, the statement is true.

With the Introduction of Risk-Free Borrowing and Lending Changes the Nature