How can an investor earn more than the return generated by the tangency portfolio and still stay on the security market line?
A)Borrow at the risk-free rate and invest in the tangency portfolio.
B)Add high risk/return assets to the portfolio.
C)Adjust the weight of stock in the portfolio to include fewer high-return stocks.
D)It cannot be done.

Question

Quizplus · Accepted Answer

By borrowing at the risk-free rate and investing in the tangency portfolio, the investor can increase their overall return without sacrificing their position on the security market line. This strategy is known as leverage and it allows the investor to amplify their returns while still maintaining the optimal level of risk. Adding high risk/return assets to the portfolio or adjusting the weight of stocks in the portfolio both involve taking on more risk, which could push the investor off the security market line. Therefore, option A is the best choice.

How Can an Investor Earn More Than the Return Generated