Lending vs. Borrowing @RFR Along CML

[archived_user]

Hi, I’m a bit confused about the following question:
Vol. 4 P. 287
An investor with a port. located on the CML to the left of the market port. has
A. lower unsystematic risk than the market port.
B. higher unsystematic risk than the market port.
C. less than 100% of his wealth invested in the market port.
D. more than 100% of his wealth invested in the market port.
The answer is C. The answer sheet says an investor with a port. located on the CML to the left of the market port (M point). has a lending portfolio. Is this always correct? How do you conclude the investor lend any money when his port. falls to the left of M? The expected return of this port. should land between RFR and market return.
What about the port. on the M point? And what about the port. on the right of M point along CML? Thx for insight.

 

[archived_user]

The portfolio at the M point is the market portfolio and an investor gets that if they invest all their $ in the market portfolio. To the left, the investor is getting RFR on at least part of their portfolio so they must have lent some money at the risk-free rate. To the right of M, they are getting a return > M return so they borrowed money at RFR and invested it in the market.

 

[archived_user]

Thanks, JoeyFVivre. So @ M point, the investor neither lend nor borrow. They invest all from their own pocket?

 

[archived_user]

Yes

 

[archived_user]

Hyang
When you are investing you are either lending money(in terms of bond investments) or investing in shares.Regarding CML, there are four imp things
1)Risk free rate(Which is Y intercept: here you invest everything in trasury or risk free bonds by “Lending” money to that agency/institute)
2) Area between Rf point and M point(ie on the left hand side of M point):Any combination here means that u r investing partly in market portfolio and partly in risk free investment
3)M point: U r investing 100% in market portfolio
4) On the right hand side of M point:Here you are taking (borrowing) money at risk free rate and investing it in market portfolio.

 

[archived_user]

Thx, AJ8888