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 investors will only invest in the riskless asset.
B)the capital market line which shows that investors will invest in a combination of the riskless asset and the tangency 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 tangency portfolio.
E)the capital market line which 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, which shows that investors will invest in a combination of the riskless asset and the tangency portfolio. This is because the tangent portfolio is the most efficient portfolio in terms of risk and return, and investors can achieve any level of risk and return they desire by combining this portfolio with the riskless asset. Therefore, the optimal portfolio for investors is a combination of the two assets.

The Combination of the Efficient Set of Portfolios with a Riskless