Statement

Capital Market

Security Market

Line $($CML$)$

Line $($SML$)$

This line specifies the linear relationship between the risk $({}_M)$ and the expected return $)$ for efficient portfolios.

The dependent variable is the expected return on an efficient portfolio, and the independent variable is the risk represented by an efficient portfolio in addition to the risk$-$free rate.

This line specifies the linear relationship between the risk $(b_i)$ and the return $(r_i)$ for an individual security or a portfolio.

If an investor wants to hold an efficient portfolio that offers an expected return of $10\%,$ should the investor select portfolio A that exhibits a standard deviation of $3\%$ or portfolio $C$ that has a standard deviation of $8\%?($Assume that both the portfolios offer an expected return of $10\%.)$

The investor should select portfolio $C.$

The rational investor will be indifferent about the portfolio selection.

The investor should select portfolio A$.$

Which of the following is the correct formula for the CML$?$

$r_i=r_{RF}+(r_M-r_{RF})b_i$

hat$(r{)}_P=r_{RF}+[\frac{\text{h}\text{a}\text{t}(r{)}_M-r_{RF}}{{}_M}]{}_P$

$r_i=r_{RF}+(R{P}_M)b_i$