The Change from a Straight to a Kinked Capital Allocation

question 47

Multiple Choice

The change from a straight to a kinked capital allocation line is a result of:

• A) reward-to-volatility ratio increasing.
• B) borrowing rate exceeding lending rate.
• C) an investor's risk tolerance decreasing.
• D) increase in the portfolio proportion of the risk-free asset.
• E) none of these.

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Definitions:

Monitors Driving

The act of using monitoring devices or technology to track and improve driving behavior, typically for safety or efficiency purposes.

Moral Hazard

A situation in which one party is more likely to take risks because the negative consequences of the risk will be borne by another party.

Buying Insurance

The process of obtaining a policy from an insurance company to protect against financial losses from specified risks, in exchange for a premium.

Adverse Selection

A situation in financial markets where buyers and sellers have different information, leading to transactions that favor the party with more information.