The Capital Allocation Line can be described as the
A)investment opportunity set formed with a risky asset and a risk-free asset.
B)investment opportunity set formed with two risky assets.
C)line on which lie all portfolios that offer the same utility to a particular investor.
D)line on which lie all portfolios with the same expected rate of return and different standard deviations.
E)none of the above.

Question

Quizplus · Accepted Answer

The Capital Allocation Line (CAL) is formed by combining a risky asset (usually a stock or a stock portfolio) and a risk-free asset (such as Treasury bills). The CAL represents all possible combinations of risky and risk-free assets that an investor can create, depending on his/her risk preference. It is a straight line that starts from the risk-free rate and goes through the expected return of the risky asset. The slope of the CAL is known as the Sharpe ratio, which measures the excess return per unit of risk. Therefore, option A is the correct answer, as it describes the investment opportunity set formed with a risky asset and a risk-free asset.

The Capital Allocation Line Can Be Described as the