The correct answer is: A. capital market line.
The capital market line (CML) is a line that shows the relationship between risk and return for a portfolio of risky assets. The CML is constructed by plotting the expected return and standard deviation of returns for all possible portfolios of risky assets. The slope of the CML is equal to the market risk premium, which is the additional return that investors expect to earn for bearing market risk.
The formula for the CML is:
$E(r_p) = r_f + \beta_p(E(r_m) – r_f)$
where:
- $E(r_p)$ is the expected return on portfolio $p$
- $r_f$ is the risk-free rate of return
- $\beta_p$ is the beta of portfolio $p$
- $E(r_m)$ is the expected return on the market portfolio
The beta of a portfolio is a measure of its systematic risk, which is the risk that cannot be diversified away. The higher the beta of a portfolio, the more sensitive its returns are to changes in the market.
The CML can be used to calculate the expected return and standard deviation of returns for any portfolio of risky assets. To do this, you would first need to estimate the beta of the portfolio. You can then use the CML to calculate the expected return and standard deviation of returns for the portfolio.
The CML is a useful tool for investors who are trying to construct a portfolio that meets their risk and return objectives. By understanding the CML, investors can make informed decisions about how to allocate their assets.
The other options are incorrect because they do not accurately describe the formula that is used to calculate the CML.