Potfolios that lie of the CML: contain the same risky assets have some unsystematic risk contain some of the risk-free assets have less sytematic risk than the market potfolio. Answer being A but I can’t see what’s wrong the B or C. I thought CML was plotted against sd (systematic + unsystematic)? Also potfolio’s on the CML are combinations of a risk portfolio and a risk free asset so what’s wrong with C?
all the portofolio on the CML are complitely diversified so no unsystematic risk
its A. on the CML, your taking the same risky assets from the market portfolio, but your taking a smaller percentage of them, and balancing the rest with risk free assets if your to the left of the market portfolio. It can’t be B because the market portfolio consists of all the risky assets, hence a perfectly diversified portfolio, and there is no unsystematic risk. It can’t be C because if you are to the right of the market portfolio, you have none of the risk free assets. you are borrowing money to purchase a higher amount of the market portfolio that consists of only risky assets.
okay I get why it’s not B but I still don’t understand why it can’t be C. Surely if you are to the left of the market portoflio on the CML you are holding a combination of risky assets and risk free assets??
yes that is true, but the line continues to the right. On the right side, there are no risk-free assets. so C is true to the left of the market portfolio, but is not true EVERYWHERE on the CML.
Ah makes sense now. Thanks for your help.