When borrowing and lending at a risk-free rate are allowed, which capital allocation line (CAL) should the investor choose to combine with the efficient frontier?
I) The one with the highest reward-to-variability ratio.
II) The one that will maximize his utility.
III) The one with the steepest slope.
IV) The one with the lowest slope.
A. I and III
B. I and IV
C. II and IV
D. I only
E. I, II, and III
E. I, II, and III
The optimal CAL is the one that is tangent to the efficient frontier. This CAL offers the highest reward-tovariability ratio, which is the slope of the CAL. It will also allow the investor to reach his highest feasible level of utility.
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