Borrowing at the risk free rate and investing all the borrowed money and the investor's money in risky asset results in a portfolio that has an expected return and standard deviation such that it lies on the extension of the ______ connecting the risk free rate and the risky asset.

Question

Quizplus · Accepted Answer

This strategy describes the creation of a leveraged portfolio, which according to the Capital Market Line (CML) principle, results in a straight line connecting the risk-free rate and the risky asset in the risk-return space. This line represents portfolios with different levels of investment in the risky asset and the risk-free asset, showing how leverage can increase both expected return and risk.

Borrowing at the Risk Free Rate and Investing All the Borrowed