In the presence of a risk-free asset, the investor's job is to:
I. invest in the market portfolio
II. find an interior portfolio using quadratic programming
III. borrow or lend at the risk-free rate
IV. read and understand Markowitz's portfolio theory
A) I and II only
B) I and III only
C) II and IV only
D) IV only

Question

Quizplus · Accepted Answer

When a risk-free asset is available, the investor can choose to invest in the market portfolio (I) and then allocate a portion of their portfolio to the risk-free asset (III) to adjust their risk level. They do not need to use quadratic programming to find an interior portfolio (II) and while understanding Markowitz's portfolio theory (IV) can be useful, it is not the primary focus in this context.

In the Presence of a Risk-Free Asset, the Investor's Job