I thought B is correct. The CML line in the book is split into two parts. Right of tangency as “Borrowing” and left as “lending”. I thought right of point of tangency provides best risky scenario. Could you please point what is wrong with my thinking. ----------------------------------------------- According to capital market theory, which of the following represents the risky portfolio that should be held by all investors who desire to hold risky assets? A) Any point on the efficient frontier and to the left of the point of tangency between the CML and the efficient frontier. B) Any point on the efficient frontier and to the right of the point of tangency between the CML and the efficient frontier. C) Any point on the efficient frontier and above the CML. D) The point of tangency between the capital market line (CML) and the efficient frontier. Your answer: B was incorrect. The correct answer was D) The point of tangency between the capital market line (CML) and the efficient frontier. Capital market theory suggests that all investors should invest in the same portfolio of risky assets, and this portfolio is located at the point of tangency of the CML and the efficient frontier of risky assets. Any point below the CML is suboptimal, and points above the CML are not feasible.
We are concern with the CML line not the efficient frontier when comparing different scenarios of (risky- , risk free assets) combinations