Final answer:
The Sharpe ratio of the best feasible CAL is the point where the slope of the CAL is maximized, indicating the optimal risk-adjusted returns. It is calculated by dividing the difference between the expected portfolio return and the risk-free rate by the portfolio's standard deviation.
Step-by-step explanation:
The Sharpe ratio is a measure used in finance to gauge the performance of an investment by adjusting for its risk. It's calculated by taking the difference between the investment's return and the risk-free rate and dividing it by the investment's standard deviation. The best feasible Capital Allocation Line (CAL) represents the optimal portfolio of risk-free assets and risky assets that maximize an investor's return for a given level of risk. To find the Sharpe ratio of the best feasible CAL, we would look for the point where the slope of the CAL, which represents the Sharpe ratio, is maximized.
To calculate the Sharpe ratio we use the formula:
Sharpe Ratio = (Rp - Rf) / σp
Where Rp is the expected portfolio return, Rf is the risk-free rate, and σp is the standard deviation of the portfolio's excess returns. A higher Sharpe ratio indicates a more favorable risk-adjusted return. In the context of the Capital Market Line (CML), the market portfolio typically has the highest Sharpe ratio since it is the tangent from the risk-free asset to the efficient frontier.