Optimal Risky Portfolio - Capital Allocation Line

[keep_running]

How is the optimal risky portfolio determined when computing the capital allocation line.

 

[S2000magician]

It’s where the CAL intersects the efficient frontier.
The CAL that you want is the CML – the capital market line – which is the CAL with the highest Sharpe ratio; it’s tangent to the efficient frontier.

 

[keep_running]

With risk free asset a known return, we are able to create a CAL line that is able to touch the efficient frontier at a given point, and that given point is the optimal risky portfolio?

 

[S2000magician]

If the CAL you are using is, in fact, the CML (i.e., the CAL with the highest Sharpe ratio), then that point is the optimal (pure) risky portfolio.