Question

What is the slope of the Capital Allocation Line if the risk-free rate in the economy is 5%, the expected return on the risky asset is 20% and the standard deviation of the return on the risky asset is 30%?

a) 0.6
b) 0.3
c) 0.4
d) 0.5

Answer 1

The slope of the Capital Allocation Line can be calculated using the formula: slope = (expected return on the risky asset - risk-free rate) / standard deviation of the return on the risky asset. Given the specific values provided, the slope is 0.5.

The slope of the Capital Allocation Line can be calculated using the formula:

slope = (expected return on the risky asset - risk-free rate) / standard deviation of the return on the risky asset

Given that the risk-free rate is 5%, the expected return on the risky asset is 20%, and the standard deviation of the return on the risky asset is 30%, the slope can be calculated as:

slope = (20% - 5%) / 30% = 0.5

Therefore, the slope of the Capital Allocation Line is 0.5.