Explanation:
The CML extends from the risk-free rate of return to the point of tangency on the efficient frontier. Under the Markowitz framework, the CML is based on investments' expected returns and standard deviations. Beta is used under the framework of the capital asset pricing model (CAPM) and is not relevant in the context of the CML.
(Book 1, Module 5.1, LO 5.d)
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Question 16
A hedge fund uses the Markowitz equation to search for efficient portfolios and then forms a long portfolio by finding the optimal combination of the efficient frontier and the risk-free rate. Using this technique is consistent with the capital market line (CML), which extends from the risk-free rate of return through:
A
the market portfolio at the point of tangency with the efficient frontier.
B
the market portfolio with a beta of one.
C
any point on the efficient frontier.
D
the market portfolio with a beta of zero.
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