This question involves both concepts and some simple calculations. The CAPM implies that the market portfolio is the optimal risky portfolio, and thus is the best portfolio to use along with either borrowing or lending at the risk-free rate of interest. Consider the following assets or portfolios:
Asset Expected return Standard Deviation Covariance with the market
A 10.0% 17.0% not given
B 14.0% 28.0% not given
C 8.0% 12.0% not given
D 3.0% 15.0% 0.000%
if the CAPM holds, and one of these four asset is the market portfolio, which asset isthe market portfolio?Although there is enough information in the table to infer the risk-freerate, if you are unable to determine it then at the expense of 4 points on this question youcan instead simply assume the risk-free rate is 2.5% (which is not theactualrisk-free rate) inorder to continue with the problem.