Answer: a capital allocation line.

**Correct Answer: A** **Explanation:** In portfolio theory, when you combine a risk-free asset with a risky asset, you create a straight line in the risk-return space known as the **Capital Allocation Line (CAL)**. This line represents all possible combinations of the risk-free asset and the risky portfolio. **Key Concepts:** 1. **Capital Allocation Line (CAL):** - Shows the risk-return trade-off when combining a risk-free asset with a risky portfolio - Is a straight line in the expected return-standard deviation space - The slope of the CAL is the Sharpe ratio: (E(R) - R_f) / σ 2. **Markowitz Efficient Frontier:** - This represents the set of optimal portfolios that offer the highest expected return for a given level of risk - Only includes risky assets (no risk-free asset) - Is curved, not straight 3. **Indifference Curves:** - These represent an investor's preferences for risk and return - Show combinations of risk and return that provide equal utility to the investor - Are subjective and vary by investor **Why other options are incorrect:** - **Option B:** The Markowitz efficient frontier only includes risky assets, not combinations with the risk-free asset. - **Option C:** Indifference curves represent investor preferences, not the actual combinations available in the market. **Portfolio Theory Context:** The combination of a risk-free asset with a risky portfolio allows investors to achieve any point along the CAL, which represents the best possible risk-return trade-off available in the market. The optimal portfolio for an investor is found where the CAL is tangent to the investor's highest indifference curve.

Author: LeetQuiz .