Can someone please explain this to me:
A portfolio to the right of market portfolio on the CML is:
a) A lending portfolio
b) a borrowing portfolio
c) an inefficient portfolio
I chose c) but OA is B.
Such a portfolio would be long more than 100% the market portfolio, and short the risk-free asset: borrowing.
Thanks S2000magician. Could you please explain why such a portfolio won’t be an inefficient portfolio? I thought that I can get more returns by investing in market portfolio. For instance, in the following figure, why would anyone want to invest in IBM if, for the same level of risk, one can get more returns by investing in market portfolio…Here’s the URL:https://postimg.org/image/yygsnu4st/
When you add the risk-free asset to the assets used to create the efficient frontier, the CML becomes the efficient frontier.
Think about it.
Hello S2000magician, Thanks so much for your help. I completely agree with you. However, in above figure IBM is neither on Efficient frontier nor on CML but on the right hand side of CML. Isn’t it? If the point were on CML, then I would agree with what you have said–i.e. use risk-free asset and invest it in market portfolio, if the stock were _ on _ CML. I think the question says that the security is on the right of market portfolio on CML. Do you think there is an misunderstanding on my part?
The original question said that the portfolio is _ on _ the CML. So it’s to the right of the market portfolio and above the market portfolio.
You’re correct about IBM, but it’s not on the CML, so it doesn’t illustrate the situation in the original question.
Thanks S2000magician for your help.
My pleasure.