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Draw the capital allocation line

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You have a portfolio of one risky asset and one risk-free asset. The risky asset has an expected return of 20% and a variance of 16%. The T-bill rate (that is the risk-free rate) is 6%. Your client Mary is thinking of investing 75% of her portfolio in the risky asset and the remaining in a T-bill.

a) If Mary wants to find a general equation for the expected return and risk of her portfolio what are the equations that you would suggest to her?

b) Based on your answer in part a, draw the Capital Allocation Line (CAL).

Reference no: EM132675693

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