The Sharpe-optimal portfolio will be the investment opportunity set which lies on a straight line that has which of the following characteristics?
A)the flattest slope when the line intersects the vertical axis at the risk-free rate
B)the steepest slope when the line intersects the vertical axis at the risk-free rate
C)the steepest slope when the line intersects the vertical axis at the origin
D)the flattest slope when the line intersects the vertical axis at the market rate
E)the steepest slope when the line intersects the vertical axis at the market rate

Question

Quizplus · Accepted Answer

The Sharpe-optimal portfolio is the portfolio with the highest Sharpe ratio, which is the ratio of excess return over volatility. The straight line that represents the investment opportunity set is called the capital market line (CML), and it intersects with the vertical axis at the risk-free rate. The Sharpe ratio is highest when the line is steepest, which means that the portfolio with the highest Sharpe ratio will be the portfolio that lies on the CML with the steepest slope. Hence, the correct choice is B, which corresponds to the steepest slope when the line intersects the vertical axis at the risk-free rate.

The Sharpe-Optimal Portfolio Will Be the Investment Opportunity Set Which