If we have 2 risky assets (no shortselling) and a risk-free asset where borrowing rate is greater than lending rate, what would be the efficient frontier?
Understand the Problem
The question is asking about the efficient frontier in a portfolio that includes 2 risky assets and a risk-free asset, particularly focusing on a scenario where the borrowing rate is greater than the lending rate. This likely pertains to portfolio theory in finance.
Answer
Capital market line to tangency portfolio, then traditional efficient frontier.
The efficient frontier consists of the capital market line up to the tangency portfolio and follows the traditional efficient frontier of risky assets beyond that, reflecting the difference in borrowing and lending rates.
Answer for screen readers
The efficient frontier consists of the capital market line up to the tangency portfolio and follows the traditional efficient frontier of risky assets beyond that, reflecting the difference in borrowing and lending rates.
More Information
In the presence of a risk-free asset with different borrowing and lending rates, the efficient frontier will change. Up to the tangency portfolio, it follows the capital market line reflecting the lending rate. Beyond this point, it uses the traditional efficient frontier due to no short selling and higher borrowing costs.
Tips
A common mistake is to assume a single rate for both borrowing and lending, but differences can significantly alter the efficient frontier.
Sources
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