In efficient market conditionsin CAPM equilibrium. the a) risk free asset lies on both CML and SML b) any risky security lies on both SML and CML A correct correct B correct incorrect C incorrect correct D incorrect incorrect

I’d say B

Not sure about statemetn a…the rfr defines the line, but I don’t know what they mean about being on the line. Statement b should be incorrect.

mwvt9 … same here just thought that rfr can’t be misspriced… so it’s on the SML but it’s a strange concept for me

you are right ^^ mwvt9. the rfr is the start-point(or end point) of the line i am curious about about risky securities, where do they lie in the Expected return vs std deviation chart wrt to the CML.? above the line/below the line or is this question irrelevant.? i guess it could lie anywhere on the curved efficient frontier.? EDIT: if this question sounds strange, brace yourself for more. This is (paraphrased) from a 2006 cfai sample exam

Any individual risky security could like below the CML.

In an efficient market in equilibrium, any individual risky asset lies on the SML BUT NOT on CML. The CML represents combinations of the risk free asset and the market portfolio.

mwvt9 Wrote: ------------------------------------------------------- > Any individual risky security could like below the > CML. ah yes. thanks

I’d say the answer is B. The risk free asset is definitely on both the SML and CML. In equlibrium, all risky assets would have to be perfectly priced, so they would all be on the SML. However, they are not on the CML because of their unsystematic risk. Only by holding the market portfolio can you eliminate all the unsystematic risk. So I would think that all risky assets would have to be below the CML.

So what was the answer Dsylexic?

B, ofcourse. all you guys were correct.


Quoting from some reading: "All assets ( and portfolios) lie on the SML yet only efficient portfolios (diversified) which are combinations of the market portfolio and the riskless asset lie on the CML.