Question

Under the CAPM, the only way an individual stock could plot on the CML is if it happens to have exactly the same expected return and standard deviation as the market portfolio. True /False

Answer 1

The above statement is TRUE

The Capital Market Line represents the risk premium that an investor earns when he or she takes on additional risk. There is diversification of market portfolio that carries systematic risks, and whose expected return equals that of the entire market return.

The securities which generate higher results for a certain risk, are usually above the CML and not "On the CML". To be plotted on the CML, the security must return same expected return and standard deviation as the market portfolio.

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