The Sharpe-optimal fund allocation line has
A) a slope of -1.
B) a slope of +1.
C) the highest slope possible given the portfolio opportunity set.
D) a slope of zero.
E) none of the above.

Question

Quizplus · Accepted Answer

The Sharpe-optimal fund allocation line represents the best possible combination of the risk-free asset and the risky portfolio that offers the highest reward for a given level of risk. As such, it has the highest possible slope given the portfolio opportunity set, which is equal to the excess return generated by the risky portfolio divided by its standard deviation (i.e., the Sharpe ratio). Therefore, the correct answer is C.

The Sharpe-Optimal Fund Allocation Line Has