Rapid Transit in a highway median, while between stations, is no more an issue than being in a tunnel.
The problem is not the ROW; the problem is the location of stations.
Provided there is a material distance between stations ~2km on average, you can logically design a line that is ~75% in highway ROW and then veers off, likely in a tunnel, so that the stations are just outside the ROW and meet the street in a more urban-friendly way, then loop back out the highway.
Its a trade-off, as looping out a bit, adds some journey time, and material costs, but it does improve return-on-investment.
You can achieve a similar effect by decking over a highway just where a major road with station is located, to a depth of about 100M.
You can then line the deck with modest mid-rise with retail and make it less inhospitable. This is also quite costly, but not necessarily much worse than tunnelling to/from out-of-ROW stations.
The challenge w/this is that those buildings on an overpass can't have any parking and loading/waste must be done at-grade; also highway over passes tend to have extra lanes for cars and its just very tough to design them to be less than six and maybe eight lanes across, which is very challenging to mitigate.
In the case of Sheppard corridor vs the 401 corridor, my preference would be a mixed approach. Not immediately swinging to the 401 at both ends of the existing subway, but rather, going under the street in the middle, and using the 401 corridor at the edges to reach further without spending too much.
Section by section:
Don Mills to Agincourt GO: definitely stay under Sheppard, and promote local density.
Agincourt GO to McCowan: variations are possible. If this line connects to Line 2 at McCowan & Sheppard, then it is logical to stay under Sheppard. But if the decision is made to serve STC instead, then I can think of using a short section of the 401 to get there.
McCowan to Morningside: would consider running next to the 401, but on the south side (not in the middle); and shift the traffic lanes if necessary. A line on the south side would directly serve the Centennual campus, and generally easier to access for the bus routes. Then, possibly swing south to UTSC.
East of Morningside: a long shot, but it is tempting to extend the rail line further east using the 401 corridor, connect to the Lakeshore East GO, and enable rail trips between the Lakeshore East corridor and Northern Scarborough / North York. Not sure if it should be a continuation of the subway line (say, every 3-rd train goes there), or a separate lighter rail technology.
In the West:
Yonge to Wilson Heights: the subway should continue under Sheppard.
Wilson Heights to Weston Rd: should continue under Sheppard or under Wilson, there are several options for swinging from the former to the latter.
West of Weston Rd: should use the 401 corridor to cross over the Humber River. That's a lot easier than trying to follow the path of Sheppard or Wilson.
West of Islington: long shot, and there are many routing options, but following either the 401 or the 409 should be considered amongst other possibilities.
