The Capital Allocation Line provided by a risk-free security and N risky securities is
A)the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities.
B)the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier.
C)the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.
D)the horizontal line drawn from the risk-free rate.
E)none of the above.

Question

Quizplus · Accepted Answer

The Capital Allocation Line (CAL) is the line that connects the risk-free rate with a portfolio of risky securities. The optimal CAL is the one that is tangent to the efficient frontier of risky securities, drawn from the risk-free rate. This point represents the optimal allocation of funds between the risk-free asset and the risky portfolio, which depends on the investor's risk preference. Therefore, choice C best describes the Capital Allocation Line.

The Capital Allocation Line Provided by a Risk-Free Security and N