The capital allocation line, CAL, is a combination of the risk-free asset and
one or more risky assets.
Portfolio Management MCQ - Portfolio Management Section 1
The optimal portfolio for an investor like Sam is the one where the CAL is
the tangent to the investor’s highest possible indifference curve.
Highly risk-averse investors invest majority of their wealth in risk-free
assets.
A capital allocation line shows possible combinations of a risky portfolio
and the risk-free asset.
An investment in only one asset type has a worse risk-return tradeoff than
an investment in a portfolio of a risk-free asset and a risky asset because
the correlation between the risk-free asset and the risky asset is equal to
0.
