Capital Allocation Line (CAL)

[SFR]

Hi,
the formula for CAL is:
E(Rc) = Rf + reward-for-risk(sharpe-ratio)*stand.dev c
how it is possible that diffrent investors will face different CALs?

 

[idreesz]

In CAL you are assuming that a risk-free asset is combined with YOUR portfolio instead of the MARKET portfolio as assumed in CML.

 

[SFR]

MY portofolio means my risk tolerance right?

 

[bpdulog]

Your portfolio means whatever mix of risk-free and risky assets you have. The slope of everyone’s CAL will be different because of securities with different Sharpe ratios.
Portfolio A:
Stock 1 Sharpe: 0.5
Stock 2 Sharpe: 0.4
Portfolio B:
Stock 1 Sharpe: 0.8
Stock 2 Sharpe: 0.9
Portfolio B’s CAL line will be steeper because of the higher Sharpe ratios.

 

[SFR]

so my CAL depends on what kind of stock i will have in my porfolio?
So for me it would be the best to choose stocks with the biggest SE ratio right?
While CML has all possible stocks in the porfolio so there is only one CML and assumes that all investor have all these assets in their porfolios with respective market porfolio weights.

 

[bpdulog]

SFR Wrote:
——————————————————-
> so my CAL depends on what kind of stock i will
> have in my porfolio?
>
> So for me it would be the best to choose stocks
> with the biggest SE ratio right?
>
> While CML has all possible stocks in the porfolio
> so there is only one CML and assumes that all
> investor have all these assets in their porfolios
> with respective market porfolio weights.
Yup!

 

[idreesz]

You got it!