Explanation:
The Capital Market Line (CML) represents the trade-off between risk and return for efficient portfolios that include a risk-free asset. The CML is a straight line that originates from the point of the risk-free rate and is tangent to the efficient frontier. The slope of the CML represents the market price of risk, or the reward per unit of risk that the market is offering. Any point along the CML represents a portfolio that includes some combination of the market portfolio and the risk-free asset.
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Q.182 The difference between the capital market line (CML) and the efficient frontier (EF) is that:
A
The CML represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the EF represents all possible combinations of efficient portfolios, taking into account only risky assets in varying proportions.
B
The EF represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the CML represents all possible combinations of efficient portfolios, taking into account only risky assets in varying proportions.
C
The CML represents a few possible combinations of portfolios consisting of various proportions between the market portfolio and a risk-free asset while the EF represents all possible combinations of efficient portfolios, taking into account only risk-free assets in varying proportions.
D
The EF represents possible combinations of portfolios consisting of all possible proportions between the market portfolio and a risk-free asset while the CML represents all possible combinations of efficient portfolios, taking into account only risky assets in fixed proportions.
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