Capital Allocation Line (CAL)
The Capital Allocation Line (CAL) is the straight line in mean-variance space that shows all combinations of a risk-free asset and a given risky portfolio. Its slope equals the Sharpe ratio of that risky portfolio, and the line runs from the risk-free rate (where risk is zero) to the risky portfolio on the efficient frontier.
Example: An analyst notes that with a risk-free rate of 2% and a tangent portfolio with expected return 8% and standard deviation 10%, the CAL has a slope of 0.6. By choosing a mix along that line, the portfolio's risk and return move along the same trade-off.
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