siavosh

The CML has only one asset -- the entire market. As you move along the line, you are either adding cash or borrowing cash at the RFR. Doing so changes the standard deviation of the combined portfolio but the various points along the line move in perfect sync with one another.

For example, compare three investment accounts, one that holds only $100k of Apple stock, another that holds Apple plus $10k of cash, and another that holds Apple less $10k of margin borrowings. The standard deviation of cash is always zero. The returns of three portfolios will rise and fall at the same time, but only as Apple stock moves. Hence, they are perfectly correlated, even though the returns may be different.

- Robert