The Change from a Straight to a Kinked Capital Allocation

question 11

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.

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Definitions:

Average Cost

The total cost of production divided by the total quantity produced, indicating the cost per unit of output.

Marginal Costs

The additional cost incurred by producing one more unit of a good or service.

Declining

A term indicating a decrease or reduction in quantity, quality, or importance over time.

Cost Function

A mathematical relationship describing how the cost of production changes with changes in the quantity of output produced.