All portfolios on the capital market line are:
A. distinct from each other.
B. unrelated except that they all contain the risk-free asset.
C. perfectly negatively correlated.
D. perfectly positively correlated.
Answer:D
The introduction of a risk-free asset changes the Markowitz efficient frontier into a straight line. This straight efficient frontier line is called the capital market line (CML). Since the line is straight, the math implies that any two assets falling on this line will be perfectly, positively correlated with each other. Note: When ra,b = 1, then the equation for risk changes to sport = WAsA + WBsB, which is a straight line.