Question

ou invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to Multiple Choice 0.675. 0.407. 0.912. 0.325. Cannot be determined.

Answer 1

To calculate the slope of the capital allocation line (CAL), we need to use the formula:

CAL slope = (E(Rp) - Rf) / σp

where:
- E(Rp) is the expected return of the risky asset
- Rf is the risk-free rate of return
- σp is the standard deviation of the risky asset

Substituting the given values, we get:

CAL slope = (0.17 - 0.04) / 0.40
CAL slope = 0.325

Therefore, the slope of the capital allocation line is 0.325. The correct answer is option D. 0.325.