The combination of the efficient set of portfolios with a riskless lending and borrowing rate results in the:
A)capital market line which shows that all investors will only invest in the riskless asset.
B)capital market line which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio.
C)security market line which shows that all investors will invest in the minimum variance portfolio.
D)security market line which shows that all investors will invest only in the riskless asset.
E)characteristic line which shows that all investors will invest in the same combination of securities.

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, which shows that all investors will invest in a combination of the riskless asset and the tangency portfolio. This is because the tangency portfolio is the most efficient portfolio on the efficient frontier, and combining it with the riskless asset reduces the overall risk while maintaining a higher return. This combination is known as the market portfolio, and all investors will hold some combination of the riskless asset and the market portfolio based on their risk preference.

The Combination of the Efficient Set of Portfolios with a Riskless