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An investor whose portfolio lies to the right of the market portfolio on the capital market...

An investor whose portfolio lies to the right of the market portfolio on the capital market line (CML) has most likely:


A. loaned some funds at the risk-free rate and invested the remaining funds in the market portfolio.
B. borrowed funds at the risk-free rate and invested all available funds in the market portfolio.
C. invested all available funds in the risk-free asset.
D. invested all available funds in the market portfolio.

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Answer #1

Option B is correct

An investor whose portfolio lies to the right of the market portfolio on the capital market line (CML) has most likely borrowed funds at the risk-free rate and invested all available funds in the market portfolio.

The portfolio that lies to the right of the market portfolio on the CML represents a riskier portfolio than the market portfolio. To create such a portfolio the investor must borrow money to invest.

Option A is incorrect because investor must borrow money, not lend

Option C is incorrect because investing all available funds in the risk-free asset results in a portfolio that lies on the left side of the CML

Option D is incorrect because invested all available funds in the market portfolio results in a portfolio that lies on the market portfolio not to the extreme right

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