Portfolio Management. 12. CAL Capital Allocation Line (when one asset is rf) rA = Optimal Risky...

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Portfolio Management

Transcript of Portfolio Management. 12. CAL Capital Allocation Line (when one asset is rf) rA = Optimal Risky...

Page 1: Portfolio Management. 12. CAL Capital Allocation Line (when one asset is rf) rA = Optimal Risky Asset rf = Risk Free Asset Concept.

Portfolio Management

Page 2: Portfolio Management. 12. CAL Capital Allocation Line (when one asset is rf) rA = Optimal Risky Asset rf = Risk Free Asset Concept.

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12. CAL Capital Allocation Line (when one asset is rf)

rA = Optimal Risky Asset

rf = Risk Free Asset

Concept Point for line:

• For defining a straight line we require two points.

• A straight line will have only one slope [which is nothing but its angle with x-axis]

= y2 – y1

x2 – x1

• A general Equation of a straight line

Y = a + bx

rp

Return Y

Risk X

Y2= rA

Y1= rf

x1= 0 x1= σA

A

CAL

rA - rf

slope

Dependent Variable

Independent VariableConstant

Page 3: Portfolio Management. 12. CAL Capital Allocation Line (when one asset is rf) rA = Optimal Risky Asset rf = Risk Free Asset Concept.

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i. Slope of CAL :

= Excess return over risk free return rA - rf

Total risk of A σA

ii. Equation of CAL:

rp = rf + rA - rf σp

σA

Risky return for portfolio p

Risky free return for portfolio p

Price of risk

Risk of Portfolio p

Risk premium for portfolio p


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