CFA Practice Question

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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 ______.

A. 1
B. 0.46
C. 1.91
Correct Answer: B

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

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)
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