I don’t understand why “C” is not correct as well. Any thoughts?? Capital market theory implies that all investors: A) who hold risky assets will invest in the market portfolio. B) will select portfolios that lie on the Markowitz efficient frontier. C) hold at least some of the risk-free asset. Your answer: A was correct! Capital market theory suggests that all investors will invest in some combination of the risk-free asset and the market portfolio (along the capital market line). Except for a 100% allocation to the market portfolio, which lies on the Markowitz efficient frontier, any point on the CML lies above the Markowitz efficient frontier. Under the assumptions of capital market theory, an investor can borrow at the risk-free rate and invest more than 100% in the market portfolio.
Investors can hold NONE of the risk free asset by investing their entire portfolio in the market portfolio. He could also have borrow at the risk free rate to invest more in the market portfolio. In both these scenarios he does NOT hold at least some of the risk-free asset