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The best possible risk-return trade-off attainable, given the investor’s expectations of expected returns, variances, and covariances, is represented by the: A)
| the slope of the minimum-variance frontier at the global minimum-variance portfolio. |
| B)
| slope of the capital allocation line (CAL). |
| C)
| standard deviation of the market portfolio. |
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We can interpret the slope coefficient [(E(RT) − RF) / sT] of the CAL the same way we do the slope of any straight line (it’s the change in E(RT) for a one unit change in sT). Thus, it represents the risk-return trade from moving along the CAL and how much additional expected return do we get for a one-unit increase in risk. Because the tangency portfolio T is the best portfolio, the slope of the CAL line represents the best possible risk-return trade-off attainable, given the investor’s expectations of expected returns, variances, and covariances. |
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