The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the
A)capital market line that shows that investors will only invest in the riskless asset.
B)capital market line that shows that investors will invest in a combination of the riskless asset and the tangency portfolio.
C)security market line that shows that all investors will invest in the riskless asset only.
D)security market line that shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
E)capital market line that shows that investors will invest at the vertical intercept point of that line.

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 that shows that investors will invest in a combination of the riskless asset and the tangency portfolio. The tangency portfolio is the point on the efficient frontier that is tangent to the capital market line. This is the optimal portfolio for investors because it provides the highest expected return for a given level of risk. Thus, investors will invest in a combination of the riskless asset (such as Treasury bills) and the tangency portfolio.

The Combination of the Efficient Set of Portfolios with a Riskless