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 market 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 market portfolio.
E)None of the above.

Question

Quizplus · Accepted Answer

The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the capital market line (CML), which illustrates that all investors will invest in a combination of the riskless asset and the market portfolio. This is based on the Capital Asset Pricing Model (CAPM) theory, which assumes investors can borrow and lend at the risk-free rate and will adjust their portfolio according to their risk appetite, combining the market portfolio with risk-free assets.

The Combination of the Eﬃcient Set of Portfolios with a Riskless