CFA Level I · CFA Level I Exam · Portfolio Risk and Return: Part I
The slope of the capital allocation line for a combination of the risk-free asset and a risky portfolio is best described as the:
The slope is the risky portfolio's Sharpe ratio, the expected excess return over the risk-free rate divided by the portfolio's standard deviation. It measures the extra return earned per unit of total risk along the line.
- Arisky portfolio's beta
- Brisky portfolio's Sharpe ratioCorrect
- Crisky portfolio's expected return divided by its standard deviation
Explanation
The CAL slope equals (E(Rp) - Rf)/σp, which is the Sharpe ratio of the risky portfolio. The return-to-risk ratio in the last option omits the risk-free rate, so it is wrong when Rf is positive. Beta is a market-risk measure unrelated to this slope.
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