Capital Market Line (CML)

Which of the following statements regarding the differences between the capital allocation line (CAL) and the capital market line (CML) is _most accurate_, given an outperforming portfolio?

Incorrect. The slope of the CAL is typically greater than the CML.

Correct. The CAL is the straight line in risk-return space between an active portfolio and the risk-free asset. The manager expects the active portfolio will outperform the market benchmark on a risk-adjusted basis. Thus, the expected return reflected by the CAL will be greater than the CML. Correspondingly, the slope of the CAL is greater than the CML.

Incorrect. Both the CAL and the CML are formed using one risky asset and the risk-free asset.

The slope of the CML is typically greater than the CAL

For a given amount of risk, the CAL will yield a higher expected return

The CAL is formed using two risky assets relative to the CML, which utilizes only one