Draw the SML and Plot Asset C Such That It

question 16

Essay

Draw the SML and plot asset C such that it has less risk than the market but plots above the SML,and asset D such that it has more risk than the market and plots below the SML. (Be sure to indicate where the market portfolio is on your graph.) Explain how assets like C or D can plot as they do and explain why such pricing cannot persist in a market that is in equilibrium.

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Definitions:

Money Income

Money income denotes the total amount of cash or cash-equivalents received by an individual or household over a certain period, from various sources such as wages, investments, and transfers.

Budget Line

A graphical representation of all possible combinations of two goods that can be purchased with a given budget, given the prices of the goods.

Money Income

The total earnings received by an individual or household, including wages, salaries, and other income forms, usually before taxes.

Budget Line

A graphical representation of all possible combinations of two goods that can be purchased with a given income and prices.