Does it have to lie on the CML? If not, I dont understand how it cant. Please help!

Yes, Otherwise one is taking risk w/o being compensated for it. They could either obtain a higher return for the same risk or obtain the same return for lower risk.

Yes, CML is the line that goes through (0, RFR) and MarketPortfolio’s (standard deviation, expected return)

Thats what I thought. This is the question, i guess its a mistake? Which of the following statements best describes the market portfolio of the Capital Asset Pricing Model (CAPM)? a)When combined with a risk free asset, the resulting portfolio has a beta between 0 an 1 b) It must plot on the CML c) The expected return of the market portfolio determines the slope of the SML d) It represents unsystematic risk, since all systematic risk has been eliminated through diversification. The answer is C.

> Which of the following statements best describes > the market portfolio of the Capital Asset Pricing > Model (CAPM)? > > a)When combined with a risk free asset, the > resulting portfolio has a beta between 0 an 1 incorrect because beta can be higher than 1 (if borrow rfr asset) > b) It must plot on the CML incorrect. Even though the statement itself is correct, but it’s not related to CAPM > c) The expected return of the market portfolio > determines the slope of the SML correct, because market premium or (expected return of the market portfolio minus rfr defines the slope) > d) It represents unsystematic risk, since all > systematic risk has been eliminated through > diversification. incorrect because unsystematic risk is diversified away, systematic stays > The answer is C. Correct

whats incorrect about B. i thought the market portfolio must plot on the CML?

Question: > Which of the following statements best describes > the market portfolio of the Capital Asset Pricing > Model (CAPM)? The CAPM is a model for pricing an individual security or a portfolio. Even though statement B is a correct statement it doesn’t directly deal with CAPM, statement C does. Does that help?

That does help thanks. Are all of the following statements correct? (just for my understanding) - The market porfolio must lie on both the CML and the SML. - The SML slope is defined by the market premium (Rm - Rfr) divided by Beta - The CML slope is defined by the market premium divided by St. dev - If inflation increases, increasing the Rfr, the SML would shift up - If something occurs that increases the Market Return, the Required Rate of Return on the portfolio would increase, making the slope steeper. Thanks in advance!