- CFA Exams
- CFA Exam: Level I 2021
- Study Session 18. Portfolio Management (1)
- Reading 53. Portfolio Risk and Return: Part II
- Subject 1. Capital Market Theory

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**CFA Practice Question**

The risk-free rate of return is 5%. The market portfolio (M) has an expected return of 16% and a standard deviation of 24%. The slope of the capital market line (CML) is ______.

B. 0.46

C. 1.91

A. 1

B. 0.46

C. 1.91

Correct Answer: B

Slope = rise/run = (16% - 5%) / (24% - 0%) = 0.46

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**User Contributed Comments**
10

User |
Comment |
---|---|

danlan |
CML, slope = excess return/sigma=(return-RFR)/sigma=0.46 |

julamo |
Can only be the CML if it's made obvious that the standard deviation is one of the independant variables. |

fahad |
Like the definition rise/run |

bmeisner |
If it was asking for the SML the slope would have been (16-5)/1 = 11 because the beta of the market portfolio is 1 and the line runs from risk free point at 0 beta to market return at 1 beta. Given the answers it had to be asking for the CML. |

Smiley225 |
Slope of SML = market risk premium. i.e 11 in this case |

Nightsurfer |
Slope of CML uses s.d. in the denominator. |

cfabuzz |
slope is equal to tan CML, which is y/x. so (0.16-0.05)/0.24 -> sharpe ratio = 0.46 |

dravinskis |
Slope CML = Sharpe Ratio |

DonAnd |
right on the money dravinskis |

khalifa92 |
y = a + b*x b: is the slope E(Rp) = Rf + (Rm-Rf)/sigma (market) * sigma (portfolio) |