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.