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.
E) none of these.

Question

Quizplus · Accepted Answer

The kink in the capital allocation line occurs when the borrowing rate exceeds the lending rate, causing a change in the slope of the line beyond the investor's own funds.

The Change from a Straight to a Kinked Capital Allocation