The Capital Allocation Line Provided by a Risk-Free Security and N

question 44

Multiple Choice

The capital allocation line provided by a risk-free security and N risky securities is

• A) the line that connects the risk-free rate and the global minimum-variance portfolio of the risky securities.
• B) the line that connects the risk-free rate and the portfolio of the risky securities that has the highest expected return on the efficient frontier.
• C) the line tangent to the efficient frontier of risky securities drawn from the risk-free rate.
• D) the horizontal line drawn from the risk-free rate.

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Definitions:

Bond Premium

The amount by which the market price of a bond exceeds its face value, often occurring when the bond's interest rate is higher than current market rates.

Semiannual Interest

Interest on a loan or security that is calculated and paid twice a year.

Straight-line Method

A depreciation technique that allocates an equal amount of depreciation each year over an asset's useful life.

Times Interest Earned Ratio

A financial metric used to determine how well a company can meet its interest obligations based on current earnings.