In Chapter 8, you talk about risk-free borrowing and risk-free lending. As I understand it, risk-free lending involves buying Treasury Bills, but what is risk-free borrowing?
You are correct in saying that risk-free lending involves buying Government of Canada Treasury Bills (since they are issued by the government and have very short maturities, they are considered a true risk-free asset). In effect, you are loaning money to the government. Risk-free borrowing, in essence, means that you can borrow money (to invest in the optimal portfolio of risky assets) at the same risk-free rate that Treasury Bills are yielding. It is important to realize that this is a theoretical situation: in reality, it is virtually impossible to borrow money at the risk-free rate. Most lenders, such as banks, charge you a rate that is a few percentage points higher than the risk-free rate.
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