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Chap007 - Chapter 7 Capital Allocation Between the Risky...

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Chapter 7 Capital Allocation Between the Risky Asset and the Risk-Free Asset Bodie, Investments, Sixth Edition 133 Multiple Choice Questions 1. The Capital Allocation Line can be described as the A) investment opportunity set formed with a risky asset and a risk-free asset. B) investment opportunity set formed with two risky assets. C) line on which lie all portfolios that offer the same utility to a particular investor. D) line on which lie all portfolios with the same expected rate of return and different standard deviations. E) none of the above. Answer: A Difficulty: Moderate Rationale: The CAL has an intercept equal to the risk-free rate. It is a straight line through the point representing the risk-free asset and the risky portfolio, in expected-return/standard deviation space. 2. Which of the following statements regarding the Capital Allocation Line (CAL) is false ? 3. Given the capital allocation line, an investor's optimal portfolio is the portfolio that
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