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Answer: Capital market line.
The correct answer is **A (Capital market line)**. When investors have homogeneous expectations, the optimal risky portfolio is the market portfolio. Combining the risk-free asset with this market portfolio forms the capital allocation line (CAL). A specific CAL that uses the market portfolio as the optimal risky portfolio is termed the **capital market line (CML)**. The CML plots the expected portfolio return (E(Rp)) against the total risk (standard deviation, σp), with the risk-free rate at the intercept and the slope representing the market risk premium. - **Option B (Security market line)** is incorrect because the SML represents the Capital Asset Pricing Model (CAPM), plotting expected return against systematic risk (beta), not total risk. - **Option C (Security characteristic line)** is incorrect as the SCL plots the excess return of a security against the excess return of the market, reflecting the security's sensitivity to market movements.
Author: LeetQuiz Editorial Team
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Under the assumption of homogeneous expectations, the relationship between total risk and expected return for portfolios combining the risk-free asset and the optimal risky portfolio is depicted on the:
A
Capital market line.
B
Security market line.
C
Security characteristic line.