You manage a risky portfolio containing 25% of Stock A, 32% of Stock B and 43% of Stock C, respectively, with expected rate of return of 18% and standard deviation of 28%. The Tbill rate is 8%. Draw the Capital Allocation Line (CAL) of your portfolio on an expected returnstandard deviation diagram. What is the slope of the CAL? Suppose that the client decides to invest in your portfolio a proportion y of the total investment budget so that the overall portfolio will have an expected rate of return of 16%. Show the position of your client on your fund’s CAL. What is the proportion y? What are your client’s investment proportions in your three stocks and the T-bill fund?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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You manage a risky portfolio containing 25% of Stock A, 32% of Stock B and 43% of Stock 
C, respectively, with expected rate of return of 18% and standard deviation of 28%. The Tbill rate is 8%.

Draw the Capital Allocation Line (CAL) of your portfolio on an expected returnstandard deviation diagram. What is the slope of the CAL?  Suppose that the client decides to invest in your portfolio a proportion y of the total 
investment budget so that the overall portfolio will have an expected rate of return of 
16%. Show the position of your client on your fund’s CAL. What is the proportion y?  What are your client’s investment proportions in your three stocks and the T-bill fund?

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