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.The one with the highest reward-to-variability ratio.
II.The one that will maximize his utility.
III.The one with the steepest slope.
IV.The one 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, which corresponds to the steepest slope, to maximize returns for a given level of risk. This CAL will also maximize the investor's utility if it aligns with their risk preferences.

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