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Answer: The CML represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the EF represents all possible combinations of efficient portfolios, taking into account only risky assets in varying proportions.
## Explanation The correct answer is **A** because: - **Capital Market Line (CML)** represents portfolios that combine the **market portfolio** (which contains all risky assets) with the **risk-free asset** in varying proportions. It shows the risk-return trade-off for efficient portfolios that include the risk-free asset. - **Efficient Frontier (EF)** represents all possible combinations of **efficient portfolios** that contain **only risky assets** in varying proportions. It shows the optimal risk-return combinations without considering the risk-free asset. ### Key Differences: - **CML** includes the risk-free asset, while **EF** considers only risky assets - **CML** is a straight line from the risk-free rate to the market portfolio (tangent point on EF) - **CML** represents the best possible risk-return combinations when investors can borrow or lend at the risk-free rate - **EF** represents the best possible risk-return combinations using only risky assets The slope of the CML represents the **market price of risk**, showing the additional return per unit of additional risk that the market offers.
Author: Tanishq Prabhu
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The difference between the capital market line (CML) and the efficient frontier (EF) is that:
A
The CML represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the EF represents all possible combinations of efficient portfolios, taking into account only risky assets in varying proportions.
B
The EF represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the CML represents all possible combinations of efficient portfolios, taking into account only risky assets in varying proportions.
C
The CML represents a few possible combinations of portfolios consisting of various proportions between the market portfolio and a risk-free asset while the EF represents all possible combinations of efficient portfolios, taking into account only risk-free assets in varying proportions.
D
The EF represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the CML represents all possible combinations of efficient portfolios, taking into account only risky assets in fixed proportions.