Assume all investors want to hold a portfolio that, for a given level of volatility, has the maximum possible expected return. Explain why, when a risk-free asset exists, all investors will choose to hold the same portfolio of risky stocks.

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Part 1

(Select the best choice below.)

A.

Investors who want to maximize their expected return for a given level of volatility will pick portfolios that maximize their Sharpe ratio. The set of portfolios that does this is a combination of a risk-free asset and a single portfolio of risky assetsthe tangential portfolio.

B.

All investors will do the same thingthat is, they will minimize their volatilitiesso they will all hold the same portfolio.

C.

All investors will do the same thingthatis, they will maximize their expected returnsso they will all hold the same portfolio.

D.

When a risk-free asset exists, it provides a safe investment opportunity. Given this safe investment opportunity, investors who maximize their expected returns for a given level of volatility will pick the same expected return and, hence, the same portfolio.