and individual securities. With these three properties, the Black model can be applied to any of several variations: no risk-free asset at all, risk-free lending but no risk-free borrowing, and borrowing at a rate higher than rf. We show here how the model works for the case with risk-free lending but no borrowing. Imagine an economy with only two investors, one relatively risk averse and one risk tol- erant. The risk-averse investor will choose a portfolio on the CAL supported by portfolio T in Figure 9.8, that is, he will mix portfolio T with lending at the risk-free rate. T is the tangency portfolio on the efficient frontier from the risk-free lending rate, rf. The risk-tolerant investor is willing to accept more risk to earn a higher-risk premium; she will choose portfolio S. This portfolio lies along the efficient frontier with higher risk and return than portfolio T. The III. Equilibrium In Capital Markets 9. The Capital Asset Pricing Model The McGraw−Hill Companies, 2001           278 PART III Equilibrium in Capital Markets     Figure 9.7 Efficient portfolios and their zero-beta companions.   E(r)               Q     P       E [rZ (Q)] Z (Q)