1215

For an investor to move further up the Capital Market Line than the market portfolio, the investor must:

A) borrow and invest in the market portfolio.

B) diversify the portfolio even more.

C) reduce the portfolio's risk below that of the market.

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Portfolios that lie to the right of the market portfolio on the capital market line ("up" the capital market line) are created by borrowing funds to own more than 100% of the market portfolio (M).

The statement, "diversify the portfolio even more" is incorrect because the market portfolio is fully diversified.

1215

In the context of the CML, the market portfolio includes:

A) all existing risky assets.

B) 12-18 stocks needed to provide maximum diversification.

C) the risk-free asset.

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The market portfolio has to contain all the stocks, bonds, and risky assets in existence. Because this portfolio has all risky assets in it, it represents the ultimate or completely diversified portfolio.

1215

What is the risk measure associated with the CML?

A) Beta.

B) Market risk.

C) Standard deviation.

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In the context of the CML, the measure of risk (x-axis) is total risk, or standard deviation. Beta (systematic risk) is used to measure risk for the security market line (SML).