Question: According to the CAPM, expected return increases as the beta of the investors portfolio increases. Suppose investors have standard mean-variance preferences (for example, U =
According to the CAPM, expected return increases as the beta of the investors portfolio increases. Suppose investors have standard mean-variance preferences (for example, U = E[r] A2 ). In a CAPM world, for any positive value of A, explain why investors should not try to maximise the value of beta by borrowing as much as possible at the risk-free rate and investing the money in the market portfolio, thereby maximising their expected returns.
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