You are evaluating two risky investments, RM and LK, which have the following di

Question

You are evaluating two risky investments, RM and LK, which have the following distributions:

Return on RM          Standard Deviation RM                   Return on LK                Standard Deviation LK
          20%                               15%                                          30%                                    25%

Suppose that an investor must pick from RM and/or LK to hold in some combination with the riskless asset (RF = 8%). As it happens, the correlation between the two assets are 1. The Capital Market Line is:

a.     The slope of the riskless asset, starting at 15% and rising at 8%.

b.     The slope of the riskless asset starting at 8% and tangent to the efficient frontier.

c.     The point of tangency where the riskless asset touches the efficient frontier.

d.     None of the above.

Explanation / Answer

b.     The slope of the riskless asset starting at 8% and tangent to the efficient frontier.

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