1215

Which of the following is the vertical axis intercept for the Capital Market Line (CML)?

A) Expected return on the market.

B) Expected return on the portfolio.

C) Risk-free rate.

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The CML originates on the vertical axis from the point of the risk-free rate.

1215

According to capital market theory, which of the following represents the risky portfolio that should be held by all investors who desire to hold risky assets?

A) Any point on the efficient frontier and to the left of the point of tangency between the CML and the efficient frontier.

B) Any point on the efficient frontier and to the right of the point of tangency between the CML and the efficient frontier.

C) The point of tangency between the capital market line (CML) and the efficient frontier.

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Capital market theory suggests that all investors should invest in the same portfolio of risky assets, and this portfolio is located at the point of tangency of the CML and the efficient frontier of risky assets. Any point below the CML is suboptimal, and points above the CML are not feasible.

1215

The market portfolio in the Capital Market Theory contains which types of investments?

A) All risky and risk-free assets in existence.

B) All stocks in existence.

C) All risky assets in existence.

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The market portfolio contains all risky assets in existence. It does not contain any risk-free assets.

1215

A portfolio to the right of the market portfolio on the capital market line (CML) is created by:

A) holding both the risk-free asset and the market portfolio.

B) fully diversifying.

C) holding more than 100% of the risky asset.

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

The statement, "holding both the risk-free asset and the market portfolio" refers to portfolios that lie to the left of the market portfolio. Portfolios that lie to the left of  point M are created by lending funds (or buying the risk free-asset). These investors own less than 100% of both the market portfolio and more than 100% of the risk-free asset. The portfolio at point R_f (intersection of the CML and the y-axis) is created by holding 100% of the risk-free asset.  The statement, "fully diversifying" is incorrect because the market portfolio is fully diversified.