Explanation

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

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

Where:

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

This slope represents the market price of risk, which is the additional return per unit of risk that investors can achieve by investing in the risky portfolio rather than the risk-free asset.

Let's analyze why the other options are incorrect:

A. beta of the market - Beta measures systematic risk relative to the market, not the slope of the CAL.

C. market risk premium - The market risk premium is $E(R_m) - R_f$, which is the numerator of the slope formula, but not the complete slope itself.

Therefore, the correct answer is B. market price of risk, which represents the reward-to-risk ratio available to investors.