When an investor can borrow and invest at the risk-free rate, which of the following statements is least likely valid? A. The capital market line (CML) is straight. B. Any asset/portfolio lying below the CML is inefficient. C. The x-axis measurement of risk is the standardized covariance. D. Investors who borrow the risk-free asset to lever their portfolio will move their portfolios to the right of the market portfolio on the CML. Ans: C I guess the answer is refering to the CML SO the x-axis is the standard deviation?

SO the x-axis is the standard deviation? Yes. Standard deviation is a standard measure of risk.

It says least likely so C as the x-axis measurement of risk for the CML is the standard deviation of the portfolio.* SML’s x-axis risk is Beta, which may be ‘standardized covariance’, but I haven’t heard that term before. Beta on the SML is (COV of security to mkt / variance of the mkt). Edit: risk for CML is NOT ‘standardized covariance’, so it is C

so how can Beta become standardized covariance?

it comes standardized when applying to the SML…taking the market into consideration

Beta is the Correlation between a security and the market. Correlation = standardized covariance. The reason the answer is C is because it does not require borrowing at the risk free rate. Remember the zero-beta model? Also there are models that adjust for different borrowing and lending rates. If you recall, they have 2 lines that intercept the efficient frontier, creating three segments. The lending segment, the borrowing segment, and the fully invested segment.