The Capital Allocation Line (CAL)
The chart represents the capital allocation line of a portfolio containing the risk-free asset and a risky asset that has an expected return of 4%:
The capital allocation line is described as:
That's it!
The capital allocation line (CAL) crosses the expected return axis, or _y_-axis, at 2%. This represents the risk-free rate. The slope of the CAL is determined by rise over run. Choosing the point on the line at 15.5% standard deviation (15.5, 12), and the one at the return axis (0, 2), provides the necessary data.
$$\displaystyle \mbox{Slope}=\frac{12-2}{15.5-0}=0.645$$
Not exactly.
The risk-free rate is provided as 2%.
Not really.
The intercept with the expected return axis is the risk-free rate, not the return on the risky asset.
having a slope less than 1.
depicting a risk-free asset with 3% return.
having an intercept equal to the expected return on the risky asset.
