According to the Capital Asset Pricing Model, the introduction of a risk-free as

Question

According to the Capital Asset Pricing Model, the introduction of a risk-free asset renders the efficient frontier of efficient portfolios linear. How many portfolios of risky assets (portfolios of only risky assets) lie on the resulting Capital Market Line?

.

Two portfolios of risky assets lie on the Capital Market Line.

One portfolio of risky assets lies on the Capital Market Line.

ALL portfolios of risky assets must lie on the Capital Market Line.

The number cannot be determined.

Two portfolios of risky assets lie on the Capital Market Line.

One portfolio of risky assets lies on the Capital Market Line.

ALL portfolios of risky assets must lie on the Capital Market Line.

The number cannot be determined.

Explanation / Answer

The answer is D. it cannot be determined.

Explantion: Only effeicent portfolios lie on the Capital Market Line and not all risky asets. It represents on the risky assets that the risk averse investors hold in the market. Investors always seek to increase the expected utility by balancing the risk and returens. hence the exact number of risky assets cannot be determined

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