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Unformatted text preview: 1. w R = 40% w RF = (1 - w R ) = 60%. 2. w R = 80% w RF = (1 - w R ) = 20%. 3. w R = 100% w RF = (1 - w R ) = 0%. 4. w R = 120% w RF = (1 - w R ) = -20%. here the investor is borrowing at r RF Capital Allocation Line E(r P ) lending (investing) at r RF borrowing at r RF CAL r R = 12% w R = 100% r RF = 4% P R = 16% CAL slope = E(r P )/ P as usual, use E(r P ) and r P interchangeably CAL slope = (r R - r RF )/ R (r P - r RF )/ P = "reward-to-variability" ratio or, "reward-to-risk" ratio or Sharpe ratio on the CAL the reward-to-risk ratio is constant Next step: do the same analysis for other portfolios on the Markowitz Efficient Frontier....
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- Summer '08