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‘If investors are rational they will all choose risky assets in the same proportion when riskless...

‘If investors are rational they will all choose risky assets in the same proportion when riskless asset borrowing and lending is allowed’. Do you agree with this statement? Explain your answer.

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Answer #1

Answer :- Yes, agree with the statement mentioned in question.

Explanation :- When borrowing and lending are permissible without any risk then the rational investor will invest in risk assets only because there is trade-off between risk and return i.e., Higher the risk associated with investment in any asset, More will be expected return from that asset and Similarly, Lower the risk associated with investment in any asset, Low will be expected return from that asset. The main goal of investor is to formulate a required return from single investment or portfolio of assets. The diversifiable risk can be eliminated by an investor through a portfolio consisting of large number of well diversified securities / assets. Accordingly, The statement given in question is true.

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