The capital market line:
A)and the characteristic line are two terms describing the same function.
B)intersects the feasible set at its midpoint.
C)has a vertical intercept at the risk-free rate of return.
D)has a horizontal intercept at the market beta.
E)lies tangent to the opportunity set at its minimum point.

Question

Quizplus · Accepted Answer

The capital market line has a vertical intercept at the risk-free rate of return. The characteristic line, on the other hand, is a linear regression line that shows the relationship between an individual security’s returns and the market returns. Therefore, option A is incorrect. The capital market line intersects the feasible set at the point where the tangent to the efficient frontier is closest to the risk-free rate, not at its midpoint. Therefore, option B is incorrect. The capital market line does not have a horizontal intercept at the market beta, thus option D is incorrect. The opportunity set is tangent to the capital market line at its minimum point, hence option E is also incorrect.

The Capital Market Line