Answer-first summary for fast verification
Answer: ii, iii and v
## Explanation Let's analyze each statement: **i. The capital market line is the straight line connecting the risk-free asset with the zero beta minimum variance portfolio.** - **Incorrect**: The capital market line (CML) connects the risk-free asset with the **market portfolio**, not the zero beta minimum variance portfolio. The zero beta portfolio is part of the security market line (SML), not the CML. **ii. The capital market line always has a positive slope and its steepness depends on the market risk premium and the volatility of the market portfolio.** - **Correct**: The CML slope is (E(Rm) - Rf)/σm, where E(Rm) - Rf is the market risk premium and σm is the market portfolio volatility. Since risk premium is positive, the slope is always positive. **iii. The complete efficient frontier without a risk-free asset can be obtained by combining the minimum variance portfolio and the market portfolio.** - **Correct**: In CAPM without a risk-free asset, the efficient frontier is generated by combining the minimum variance portfolio and the market portfolio. **iv. The efficient frontier allows different individuals to have different portfolios of risky assets based upon their own risk aversion and forecast for asset returns.** - **Incorrect**: In CAPM, all investors hold the same portfolio of risky assets (the market portfolio) regardless of their risk aversion. Differences in risk aversion only affect the allocation between the risk-free asset and the market portfolio. **v. The efficient frontier assumes no transaction costs, no taxes, a common investment horizon for all investors, and that the return distribution has no skewness.** - **Correct**: These are standard assumptions of the CAPM framework. **Correct statements: ii, iii, and v** Therefore, the correct answer is **A. ii, iii and v**.
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The efficient frontier is defined by the set of portfolios that, for each volatility level, maximizes the expected return. According to the capital asset pricing model (CAPM), which of the following statements are correct with respect to the efficient frontier? i. The capital market line is the straight line connecting the risk-free asset with the zero beta minimum variance portfolio. ii. The capital market line always has a positive slope and its steepness depends on the market risk premium and the volatility of the market portfolio. iii. The complete efficient frontier without a risk-free asset can be obtained by combining the minimum variance portfolio and the market portfolio. iv. The efficient frontier allows different individuals to have different portfolios of risky assets based upon their own risk aversion and forecast for asset returns. v. The efficient frontier assumes no transaction costs, no taxes, a common investment horizon for all investors, and that the return distribution has no skewness.
A
ii, iii and v
B
i, ii and iii
C
i, iv and v
D
ii, iii and iv