Capital Market Line and Security Market Line
Not what you're looking for?
A friend in finance shows you the following two figures (see attachment). He asks you to find about them. S represents the safe asset. M represents the market portfolio.
a) What is the name of the line segment S and M in Figure 1?
b) What is the name of the line segment S and M in Figure 2?
c) How can one achieve a portfolio with the characteristics of point B in Figure 1?
d) Point X and point X' are meant to represent common stock of ABC. In figure 1, ABC appears to be riskier than the market portfolio. In figure 2 it appears to be safer. Is there something wrong with the two figures? If so, explain why ABC cannot appear as shown. If it is possible that the two figures are correct, explain what must be true about ABC to cause its representation tobe in such a different location in the two graphs.
See attached file for full problem description.
Purchase this Solution
Solution Summary
Answers questions related to CAPITAL MARKET LINE (CML) and SECURITY MARKET LINE (SML).
Solution Preview
Please see attached file.
a) The name of the line segment between S and M in Figure 1 is CAPITAL MARKET LINE (CML)
b) The name of the line segment between S and M in Figure 1 is SECURITY MARKET LINE (SML)
c) The portfolio B is obtained by lending part of the portfolio at the risk-free rate (RFR) which is S and investing the remainder in the market portfolio M.
All portfolios to the left of M in Figure 1 (like B) are obtained by lending part of the portfolio at S and investing the remainder in ...
Purchase this Solution
Free BrainMass Quizzes
Economics, Basic Concepts, Demand-Supply-Equilibrium
The quiz tests the basic concepts of demand, supply, and equilibrium in a free market.
Pricing Strategies
Discussion about various pricing techniques of profit-seeking firms.
Elementary Microeconomics
This quiz reviews the basic concept of supply and demand analysis.
Economic Issues and Concepts
This quiz provides a review of the basic microeconomic concepts. Students can test their understanding of major economic issues.
Basics of Economics
Quiz will help you to review some basics of microeconomics and macroeconomics which are often not understood.