Fill This Form To Receive Instant Help
Fill This Form To Receive Instant Help
Homework answers / question archive / Which of the following statements regarding the capital allocation line (CAL) of the risky portfolio P is/are true? Select one or more: A
Which of the following statements regarding the capital allocation line (CAL) of the risky portfolio P is/are true? Select one or more: A. The slope of the CAL equals the increase in the expected return of the complete portfolio per unit of additional standard deviation. B. The CAL shows investment opportunity set formed with P and one risk free asset. C. Any portfolios on the CAL share the same mean-variance utility. D. The optimal complete portfolio has higher Sharpe ratio than any other portfolios on the CAL. E. The slope of the CAL is equal to the Sharpe ratio of P.
The following statements are correct for the Capital Allocation line.
E.
The slope of the CAL measures the trade-off between risk and return. A higher slope means that investors receive a higher expected return in exchange for taking on more risk. The value of this calculation is known as the Sharpe ratio. True
B.
he capital allocation line (CAL), also known as the capital market link (CML), is a line created on a graph of all possible combinations of risk-free and risky assets. The graph displays the return investors might possibly earn by assuming a certain level of risk with their investment. True
D.
he optimal risky portfolio is found at the point where the CAL is tangent to the efficient frontier. This asset weight combination gives the best risk-to-reward ratio, as it has the highest slope for CAL.
Explanation for false statement
A.
The graph displays the return to be made by taking on a certain level of risk. Its slope is known as the "reward-to-variability ratio". It represent both increase and decrease. False
C.
Every point on the line have different risk to reward ratio
D.
Sharpe ratio can be higher
