"Portfolios that lie to the right of the market portfolio on the capital market line (“up” the capital market line) are created by borrowing funds to own more than 100% of the market portfolio (M). " Why “borrowing” to invest on something riskier than the optimum portfolio. My question is not about asuming more risk than the market portfolio has. I am not understanding the implication of “borrowing” in this context. Assumptions on the Capital market theory doesn’t say about the limitations of funds available to invest. Are we assuming that an investor will invest maximum funds in a market portfolio and borrow additional funds for investments over market portfolio?
Yes - borrow funds at RFR and invest them in the market portfolio
I dont know if I am answering your Q but the way I look at it is that a borrowing portfolio essentially borrows money and invests it in the market portfolio. Therefore, since they earn more in the mkt portfolio than the cost of lending would be, they can achieve higher returns than just the mkt portfolio. Is that right everyone or am I off?