yes. best example- NYSE
One thing for sure is , in Markowitz ques , it was option with “investers have diminishing marginal utility of wealth” , because ques asked for “best description” although the other options were true but this diminishing utility thing was of key importance . also same ques was in schweser and i messed it there so i remembered 
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The assumptions of capital market theory are: From Scheweser Learning outcome statement:- Markowitz investors: ------------- Divisible assets: All investments are infinitely divisible. Frictionless markets: ------------------" At DopA, Could not find what you are mentioning.
http://www.professionalexamreview.com/Portfolio_Management_Study_Pilots_sample.pdf Check the reading 51 on the mentioned webpage. It clearly mentions that all investments are infinetely divisible.
To return to the question of adding the risk-free asset - the Markowitz efficient frontier is “improved” into a straight-line (more rewarding at all points but one) by combining the market portfolio with the risk-free asset in different proportions. yourstruly says that the straight-line returns more than the efficient frontier, BUT in fact the straight-line becomes the new efficient frontier. This is important to the question, which I wish I could recall more clearly, because adding the risk-free asset will indeed INCREASE the returns of the Markowitz efficient frontier (by straightening it), BUT it will DECREASE the return (and risk) of the portfolio on and along the straight-line CML. I understood, perhaps erroneously, the question to mean along the CML, and chose DECREASE. Can anyone remember how the question was framed?
The mistake you are all making is that you are confusing the CML with the Markowitz model- i.e. the efficiency frontier. Unlimited lending and borrowing at the risk free rate is a CML assumption. The correct answer was the diminishing marginal utility as increasing risk increases return at a decreasing rate.
I dont remember the question you guys are discussing. Could someone enlighten me?
sbmarti2, I agree that the answer was DIMINISHING MARGINAL UTILITY - at least, that’s what I went for, though wish I could remember the alternatives. What I’m debating is the other CML/Markowitz question, which is about what happens to return when risk-free is added - I reckon if added to Markowitz then increase (to form the CML), if added to the market portfolio (along the CML) then decrease (along with risk) - I went for the latter, but may have misunderstood the question. Incidentally, the CML IS the efficient frontier (Markowitz is the original, inferior, superseded EF). It would be great if someone could enlighten me as to the question - the uncertainty is really bugging me!
The markowitz model is separate from the CML. So if they wanted us to include unlimited lending and borrowing, they would have asked the question in reference to capital market theory, as opposed to asking in regards to the markowitz model. I agree the CML portfolio’s are better than the efficiency frontier (and theoretically become the new efficiency frontier), but unlimited lending and borrowing at the risk free rate is not one of the assumptions and is therefore not a concern.
it asked what happens to risk when you borrow at the RF rate.
when we borrow we move along the CML to the right hence increasing risk and return
actually it asked when you lend not borrow
dbfinley Wrote: ------------------------------------------------------- > actually it asked when you lend not borrow then its the opposite :D. Lower risk and lower return.
That’s a separate question, but yes, lending at the RFR leads to lower risk and return.
I think we really need clarification as to the question. If it was asked in the context of Markowitz then lending should increase the return. The optimal portfolio under Markowitz is the point at which investors’ utility curves touch the frontier tangentally. One of these points represents the market portfolio, and it was subsequently discovered that by combining this market portfolio with the risk-free asset an improved frontier would emerge in the shape of a straight-line CML (i.e. more return for same risk). In this context, therefore, adding risk-free (or lending) increases the return. However, if the question was in the context of CML, then lending would certainly decrease return (and risk). If someone could definitively clarify this we would have our answer!
The lending question was asked in the context of the CML.