If borrowing occurred at a rate greater than the rate at which risk free lending can be conducted, the efficient set becomes divided into which of the following three segments?

Question

Quizplus · Accepted Answer

When borrowing occurs at a rate greater than the rate at which risk-free lending can be conducted, the efficient set becomes divided into three segments. The first segment is the straight line between the lending rate on the return axis and tangent to the curved Markowitz efficient set, which represents the optimal portfolio for an investor who is risk-neutral and wants to borrow at the risk-free rate. The second segment is the set that lies below the straight line, which represents the optimal portfolio for an investor who is risk-seeking and wants to borrow at a rate higher than the risk-free rate to invest in risky assets. The third segment is the portion of the curved Markowitz efficient set that lies between the two tangency portfolios, which represents the optimal portfolio for an investor who is risk-averse and wants to borrow at a rate lower than the risk-free rate to invest in risky assets. Therefore, the best choice is D, which describes the set that lies below the straight line between the lending rate on the return axis and tangent to the curved Markowitz efficient set.

If Borrowing Occurred at a Rate Greater Than the Rate