When borrowing and lending at a risk-free rate are allowed,which Capital Allocation Line (CAL)should the investor choose to combine with the efficient frontier?
I.with the highest reward-to-variability ratio.
II.that will maximize his utility.
III.with the steepest slope.
IV.with the lowest slope.
A) I and III
B) I and IV
C) II and IV
D) I only
E) I,II,and III

Question

Quizplus · Accepted Answer

The investor should choose the CAL with the highest reward-to-variability ratio (I), which corresponds to the steepest slope (III), as it offers the best risk-return trade-off. Additionally, maximizing utility (II) is a goal for investors, aligning with choosing the optimal CAL.

When Borrowing and Lending at a Risk-Free Rate Are Allowed,which