The point where the capital market line is tangential to the efficient frontier is
A) The point where the portfolio returns are minimised
B) The point where the portfolio returns are maximised
C) The point where the portfolio's Sharpe ratio is minimised
D) The point where the portfolio's Sharpe ratio is maximised

Question

Quizplus · Accepted Answer

The point where the capital market line (CML) is tangential to the efficient frontier represents the market portfolio, which has the highest Sharpe ratio among all the portfolios on the efficient frontier. The Sharpe ratio measures the performance of an investment compared to a risk-free asset, after adjusting for its risk. Therefore, at this tangency point, the portfolio's Sharpe ratio is maximised, indicating the most efficient return per unit of risk.

The Point Where the Capital Market Line Is Tangential to the Efficient