Question

You plan to form a two-security portfolio and you have collected all the historical returns from...

You plan to form a two-security portfolio and you have collected all the historical returns from two securities. Therefore, you try to find out the trade off between expected rate of return and standard deviation (risk) by connecting the dots that represent different combinations of two securities in an expected return-standard deviation diagram.

This curve that connects all the dots represents different combinations of two securities in an expected return-standard deviation diagram is called:

A.

security market line.
B.

portfolio opportunity set.
C.

capital market line.
D.

capital allocation line.
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Answer #1

The correct answer is Capital market line

The Capital market line represents the different combinations of expected returns and the standard deviation. The capital market line starts from Y-Axis and the difference between Y-Axis and X-Axis represents the risk free assets and the expected return of an investor will starts moving upward as we add more risk to the portfolio. The Capital market line helps to optimize the relationship between risk and return which gives maximum returns to the investor.

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