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.© BrainMass Inc. brainmass.com October 9, 2019, 7:24 pm ad1c9bdddf
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 ...
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