Explanation

The capital allocation line (CAL) represents the risk-return trade-off available by combining a risk-free asset with a risky portfolio. The slope of the CAL is given by:

$\text{Slope of CAL} = \frac{E(R_p) - R_f}{\sigma_p}$

Where:

• $E(R_p)$ = Expected return of the risky portfolio
• $R_f$ = Risk-free rate
• $\sigma_p$ = Standard deviation of the risky portfolio (total risk)

This formula is exactly the definition of the Sharpe ratio, which measures excess return per unit of total risk.

Why the other options are incorrect:

B. Treynor ratio - Measures excess return per unit of systematic risk (beta), not total risk. Formula: $(E(R_p) - R_f)/\beta_p$

C. Jensen's alpha - Measures abnormal return relative to what would be expected based on the CAPM. Formula: $\alpha_p = R_p - [R_f + \beta_p(R_m - R_f)]$

Therefore, only the Sharpe ratio represents the slope of the capital allocation line.