The change from a straight to a kinked capital allocation line is a result of
A) reward-to-volatility ratio increasing.
B) borrowing rate exceeding lending rate.
C) an investor's risk tolerance decreasing.
D) increase in the portfolio proportion of the risk-free asset.

Question

Quizplus · Accepted Answer

The change from a straight to a kinked capital allocation line occurs when there is a difference between the borrowing rate and the lending rate, specifically when the borrowing rate exceeds the lending rate. This creates a kink in the line because the cost of borrowing to invest more in the risky asset is higher than the return on lending (investing in the risk-free asset).

The Change from a Straight to a Kinked Capital Allocation