CFA Practice Question

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CFA Practice Question

According to the Capital Asset Pricing Model (CAPM), if investors borrow at a rate that exceeds the risk-free lending rate, the resulting borrowing portfolios will ______
A. plot on a steeper line.
B. plot on a flatter line.
C. no longer plot on a straight line.
Explanation: If investors borrow at a rate that exceeds the lending rate, the resulting borrowing portfolios will not be as profitable as they would be if borrowing and lending was carried out at the same risk-free rate. Therefore, borrowing portfolios will plot on a line with a flatter slope than portfolios constructed from borrowing at the risk-free lending rate.

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