BANKING GENERAL KNOWLEDGE
|
Question
[CLICK ON ANY CHOICE TO KNOW THE RIGHT ANSWER]
|
|
|
Lend some of her money at the risk-free rate and invest the remainder in the optimal risky portfolio
|
|
|
Borrow some money at the risk-free rate and invest in the optimal risky portfolio
|
|
|
Such a portfolio cannot be formed
|
|
|
None of the above
|
Detailed explanation-1: -Notes: An investor who wishes to form a portfolio that lies to the right of the optimal risky portfolio on the Capital Allocation Line must invest only in risky securities and borrow some money at the risk-free rate and invest in the optimal risky portfolio.
Detailed explanation-2: -Summary of capital allocation line The optimal risky portfolio is found at the point where the CAL is tangent to the efficient frontier. This asset weight combination gives the best risk-to-reward ratio, as it has the highest slope for CAL.
Detailed explanation-3: -An optimal complete portfolio is any portfolio in the capital allocation line that includes risky assets and risk-free assets. On the other hand, the optimal risky portfolio is also on the capital allocation line, but it is only composed of risky assets.
Detailed explanation-4: -An optimal portfolio is one that minimizes your risk for a given level of return or maximizes your return for a given level of risk. What it means is that risk and return cannot be seen in isolation. You need to take on higher risk to earn higher returns.
Detailed explanation-5: -What is true regarding the selection of a portfolio from those that lie on the capital allocation line?-it is the locus of portfolios that offer the same utility according to returns and std deviations.