Hi, just read this section about relaxing one of the assumptions of CAMP model. Vol. 4 Page 271 -272. Obviously, the profit of borrowing portfolio (@premium rate) will be less than the one @RFR. However, why at Exhibit 14, it shows R(b) > RFR??? I thought the expected return of the borrowing portfolio should be smaller than the risk-free rate one? Yet the graph exhibited just the opposit. The point of R(b) is above RFR along the E® axis. Please advise.
expected return at zero std dev is your RFR or the rate at which you lend/borrow your capital -you are borrowing at RFR and investing in portfolio F -you borrow at R(b) and invest in portfolio K E® when you borrow at R(b) < E® if you borrow at RFR
Right, the expected return of the borrowing portfolio @premium rate should be smaller than the one @RFR. So why at the graph, it shows R(b) above RFR? Should R(b) be below RFR since its return will be less???
I don’t have the book with me, but even the capm equation shows that the expected return has to account for the RFR at minimum. E® = RFR + (Beta)(market rate - rfr)