Portfolio Management. www.Safeecollege.com2 12. CAL Capital Allocation Line (when one asset is rf) rA = Optimal Risky Asset rf = Risk Free Asset Concept.

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Presentation transcript:

Portfolio Management

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= 0x1= σA A CAL rA - rf slope Dependent Variable Independent Variable Constant

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