The slope of the Capital Allocation Line formed with the risky asset and the risk-free asset is equal to
A)0.4667.
B)0.8000.
C)2.14.
D)0.41667.
E)Cannot be determined.

Question

Quizplus · Accepted Answer

The slope of the Capital Allocation Line (CAL) can be calculated as the difference in returns between the risky asset and the risk-free asset, divided by the standard deviation of the risky asset. Mathematically,

CAL slope = (E(R) - Rf) / σ

where E(R) is the expected return on the risky asset, Rf is the risk-free return, and σ is the standard deviation of the risky asset.

Assuming that the expected return on the risky asset is 12%, the risk-free return is 6%, and the standard deviation of the risky asset is 20%, we can calculate the slope of the CAL as:

CAL slope = (0.12 - 0.06) / 0.20 = 0.06 / 0.20 = 0.3

Therefore, the correct answer is A) 0.4667, which is the closest value to 0.3 among the given choices.

The Slope of the Capital Allocation Line Formed with the Risky