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Answer: The capital market line always has a positive slope and its steepness depends on the market risk premium and the volatility of the market portfolio.
**Explanation:** A is correct. The capital market line connects the risk-free asset with the market portfolio, which is the efficient portfolio at which the capital market line is tangent to the efficient frontier. The equation of the capital market line is as follows: \[ \bar{R}_e = R_F + \left( \frac{\bar{R}_M - R_F}{\sigma_M} \right) * \sigma_e \] where the subscript e denotes an efficient portfolio. Since the shape of the efficient frontier is dictated by the market risk premium, \( \bar{R}_M - R_F \), and the volatility of the market, the slope of the capital market line will also be dependent on these two factors. **Why other options are incorrect:** - **B:** The capital market line connects the risk-free asset with the market portfolio, not the zero-beta minimum-variance portfolio. - **C:** The portfolio with the lowest standard deviation (minimum variance portfolio) is typically held by the most risk-averse investors, not the least risk-averse. - **D:** Under CAPM assumptions, all investors hold the same portfolio of risky assets (the market portfolio) regardless of their individual forecasts, differing only in their allocation between the market portfolio and the risk-free asset.
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Two risk analysts are attending a seminar on the topic of modern portfolio theory. One of the presentations in the seminar focuses on the efficient frontier, the capital market line, and the CAPM. Assuming the CAPM holds, which of the following observations is correct for the analysts to make?
A
The capital market line always has a positive slope and its steepness depends on the market risk premium and the volatility of the market portfolio.
B
The capital market line is the straight line connecting the risk-free asset with the zero-beta minimum-variance portfolio.
C
The portfolio of risky assets with the lowest standard deviation on the efficient frontier is typically held by the least risk averse investors.
D
The efficient frontier indicates that different individuals hold different portfolios of risky assets based upon their individual forecasts for asset returns.
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