When Borrowing and Lending at a Risk-Free Rate Are Allowed

question 68

Multiple Choice

When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier?I) The one with the highest reward-to-variability ratio.II) The one that will maximize his utility.III) The one with the steepest slope.IV) The one with the lowest slope.

• A) I and III
• B) I and IV
• C) II and IV
• D) I only
• E) I, II, and III

---

Definitions:

Market Components

The different elements that make up a financial market, including stocks, bonds, currencies, commodities, and derivatives.

Expected Returns

The anticipated return on an investment, estimating the average of probability-weighted returns for a given asset.

Probability Distribution

A probability distribution is a mathematical function that provides the probabilities of occurrence of different possible outcomes in an experiment.

Variability

The extent to which data points in a set differ from each other and from the mean of the set; a measure of dispersion or volatility.