Answer: Capital allocation line

## Explanation When we introduce a risk-free asset into portfolio construction, the line that shows all possible combinations of the risk-free asset and the market portfolio is called the **Capital Allocation Line (CAL)**. ### Key Points: - **Efficient Frontier**: Shows the set of optimal portfolios that offer the highest expected return for a defined level of risk, but does NOT include the risk-free asset - **Capital Market Line (CML)**: A special case of the CAL when the market portfolio is used as the risky asset - **Security Market Line (SML)**: Shows the relationship between expected return and systematic risk (beta) in the Capital Asset Pricing Model - **Capital Allocation Line (CAL)**: The correct answer - represents all possible combinations of a risk-free asset and any risky portfolio The CAL has a linear relationship where the slope represents the Sharpe ratio of the risky portfolio. As we move along the CAL, we're adjusting the proportion of investment between the risk-free asset and the risky portfolio.

Author: Tanishq Prabhu