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Asked: 2024-11-25T18:32:36+05:30 In:

Capital allocation line

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Capital allocation line

The combination of the risk free asset and the portfolio of the ALL risky assets create the Capital Market line. then why in this explanation it is called CAL .
And if this explanation is correct then what is the difference between the CAL & CML .

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    1. Beginner

      The CAL line is combinations of risk & return available to an investor by combining a risk free asset with a risky portfolio.

      Some Important points related to CAL

      • The slope of the CAL is the Sharpe ratio of the risky portfolio.
      • It show how an investor can increase their expected return by taking more risk.
      • The optimal point on the CAL is where the investor indifference curve is tangent on the line.
      • The CAL is specific to an individual investor risk preferences & the particular risky portfolio.

      Capital Market Line

      It is a special case of the CAL where the risky asset is the market portfolio, representing the entire market.

      Some Important points related to CML

      • The CML represents the efficient frontier in a market with a risk-free asset
      • All portfolio on the CML are efficient, meaning they offer the highest possible return for a given level of risk.
      • The slope of the CML is the Sharpe ratio of the market portfolio

      The CAL is a personalized line for an individual investor, while the CML is a benchmark for the entire market. 

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