The All Stock Fund consists of long positions in a vast universe of very different stocks. That universe of stocks includes all the stocks in the S&P 500 plus several thousand stocks that trade on other exchanges, on the NASDAQ and even in the area of the over the counter market called the “pink sheets”. Secrest thinks that he has achieved, as much as is practically possible, the highest level of diversification with the thousands of stocks that he has included in the All Stock Fund. By making this portfolio available to investors, Secrest feels that he is not only doing a good job for his company but he is also doing the market a service by providing an efficient portfolio, which market participants can use to truly capitalize on the principles of the capital market line. Secrest thinks that his All Stock Fund has allowed investors to capitalize on the principles of the capital market line. This may not be true: A) if the All Stock Fund is efficient and even if investors cannot borrow at the risk-free rate. B) if the All Stock Fund is not efficient but could be true even if investors cannot borrow at the risk-free rate. C) under no circumstances, and investors probably can capitalize on the principles of the capital market line under the given circumstances. D) if the All Stock Fund is not efficient and/or investors cannot borrow at the risk-free rate.
Ill say D
I’m going D too
D - I think someone had posted this earlier…?
I’ll go with D as well.
D. Although he has included all stocks, he hasn’t necessarily market weighted them. And the risk free assumption is violated as wel.
Market portfolio includes all risky assets, including bonds and real estate…not only stocks. So if the portfolio insn’t efficient then even if they could borrow at the risk free they couldn’t take advantage of the CML right? I can see how D would be correct, but how would B be wrong if D is correct? Anybody remember the rational?
Well if they can’t borrow at the RFR they can’t capitalise on the CML
True. Which is why I said I could see why D is correct, but if the portfolio isn’t efficient in the first place then this portfolio manager hasn’t provided a way to utilize the CML even if you could borrow at the RFR. Still looking for why B is wrong.
forget about the first bit. It continues by saying: "…BUT COULD BE TRUE EVEN IF investors cannot borrow at the risk-free rate. " That’s a false statement and so B is wrong.
Great point! I am an idiot. Thanks riot.
Your answer: D was correct! Either of these conditions, the fund not being efficient and investors not being able to borrow at the risk-free rate, will mean that the principles of the capital market line probably do not hold.