This preview shows pages 1–2. Sign up to view the full content.
This preview has intentionally blurred sections. Sign up to view the full version.View Full Document
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% σ P σ R = 16% • CAL slope = ∆ E(r P )/ ∆ σ P • as usual, use E(r P ) and r P interchangeably • CAL slope = (r R - r RF )/ σ R ⇒ (r P - r RF )/ σ 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....
View Full Document
This note was uploaded on 10/18/2009 for the course UGBA 133 taught by Professor Distad during the Spring '08 term at University of California, Berkeley.
- Spring '08