Explanation

The Capital Market Line (CML) represents the risk-return trade-off for efficient portfolios in the Capital Asset Pricing Model (CAPM). The slope of the CML is calculated as:

Slope of CML = (Expected Return of Market Portfolio - Risk-Free Rate) / Standard Deviation of Market Portfolio

Given:

• Expected return of market portfolio (E(Rm)) = 10% = 0.10
• Standard deviation of market portfolio (σm) = 11% = 0.11
• Risk-free rate (Rf) = 2% = 0.02

Calculation: Slope = (0.10 - 0.02) / 0.11 Slope = 0.08 / 0.11 Slope = 0.72727... ≈ 0.73

Therefore, the slope of the capital market line is closest to 0.73.

Why this is correct:

• The CML slope represents the market price of risk (Sharpe ratio of the market portfolio)
• It shows the additional expected return per unit of total risk (standard deviation)
• A slope of 0.73 means investors receive 0.73% additional expected return for each 1% increase in portfolio standard deviation along the efficient frontier