Essentials Of Investments
11th Edition
ISBN: 9781260013924
Author: Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher: Mcgraw-hill Education,
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Suppose the solid line represents the capital market line that results from a
Group of answer choices
The individual optimally holds only the market portfolio, M.
The individual optimally holds portfolio B which can be partially characterized by a long position in the riskless asset.
The individual optimally holds portfolio B which can be partially characterized by a short position in the riskless security
The individual optimally holds portfolio A which can be partially characterized by a long position in the riskless security.
None of the above.
Transcribed Image Text:**Graph Description for Educational Purposes:**
The graph is used to analyze risk-return dynamics in financial studies. It consists of the following components:
1. **Axes:**
- The vertical axis is labeled as \( E(r) \), representing the expected return.
- The horizontal axis is labeled as \( \sigma \), representing risk or standard deviation.
2. **Key Points and Line:**
- A straight line originates from the point labeled \( r_F \) on the vertical axis. This point represents the risk-free return rate.
- The line extends upward and to the right, illustrating the Capital Market Line (CML) which represents risk-return trade-off of efficient portfolios.
3. **Curved Lines:**
- Three dashed curved lines are displayed, indicating the indifference curves of an investor. These lines represent combinations of risk and return that provide the same level of utility to the investor.
4. **Labeled Points:**
- Point \( A \) lies on one of the lower curved dashed lines, indicating a combination of risk and return that is less optimal on the investor's utility curve.
- Point \( B \) is positioned on a higher indifference curve, suggesting a more preferred risk-return profile.
- Point \( M \) is on the straight line (CML) and represents the market portfolio, which is tangent to the highest indifference curve attainable given the risk-free rate and market conditions.
This graph serves as a tool to understand the equilibrium in the market for risk and return, highlighting the optimal market portfolio and the investor’s preferences for risk.
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