Question

Given an optimal risky portfolio with expected return of 15%, standard deviation of 24%, and a risk free rate of 4%, what is the slope of the best feasible cal?

Answer 1

The slope of the capital allocation line (CAL) represents the expected risk premium per unit of risk and is obtained by dividing the expected risk premium (the difference between the portfolio's return and the risk-free rate) by the portfolio's standard deviation. In this case, the CAL has a slope of approximately 0.4583.

Step-by-step explanation:

The question is asking for the slope of the best feasible cal, which likely refers to the capital allocation line (CAL). The capital allocation line represents a portfolio's expected return versus its risk (standard deviation). The slope is calculated as the difference between the expected return on the optimal risky portfolio and the risk-free rate, divided by the standard deviation of the optimal risky portfolio.

To calculate the slope of the CAL:

1. Subtract the risk-free rate from the expected return of the optimal risky portfolio. In this case, 15% - 4% = 11%.
2. Divide this result by the standard deviation of the optimal risky portfolio, which is 24%. So we have 11% / 24% = 0.4583.

Therefore, the slope of the best feasible cal, or the CAL's slope, is approximately 0.4583.