Answer: to the right of the market portfolio on the capital allocation line.

## Explanation In capital market theory, the Capital Allocation Line (CAL) represents all possible combinations of the risk-free asset and the market portfolio. The CAL is a straight line that connects the risk-free rate on the vertical axis to the market portfolio on the efficient frontier. **Key concepts:** 1. **Capital Allocation Line (CAL):** Shows risk-return tradeoff when combining risk-free asset with risky portfolio 2. **Market Portfolio:** The tangency point where CAL touches the Markowitz efficient frontier 3. **Investor positions on CAL:** - **Left of market portfolio:** Lending at risk-free rate (investing in risk-free asset) - **At market portfolio:** 100% invested in market portfolio - **Right of market portfolio:** Borrowing at risk-free rate to invest more than 100% in market portfolio **Why option B is correct:** - When an investor borrows at the risk-free rate to invest more than 100% in the market portfolio, they are taking a leveraged position - This leveraged position lies to the right of the market portfolio on the CAL - The investor is essentially moving along the CAL beyond the market portfolio point **Why other options are incorrect:** - **Option A:** Portfolios cannot be above the CAL because the CAL represents the optimal risk-return tradeoff - **Option C:** This describes the market portfolio itself (tangency point), not a leveraged position **Mathematical representation:** The expected return of a portfolio on the CAL is: $$E(R_p) = R_f + \frac{E(R_m) - R_f}{\sigma_m} \times \sigma_p$$ Where: - $R_f$ = risk-free rate - $E(R_m)$ = expected return of market portfolio - $\sigma_m$ = standard deviation of market portfolio - $\sigma_p$ = standard deviation of portfolio When borrowing at $R_f$ to invest more than 100% in the market portfolio, the portfolio's standard deviation ($\sigma_p$) exceeds the market portfolio's standard deviation ($\sigma_m$), placing it to the right on the CAL.

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