Capital Allocation Line (CAL)

Keith Tan, CFA

A straight line that describes the combinations of expected return and standard deviation of return available to an investor from combining the optimal risky portfolio with the risk-free asset.

Ideally, this line should be as steep as possible.  A steeper line means that the investor gets more return per extra unit of risk taken.  The capital allocation line is steepest when it is tangential to the efficient frontier, and it is here we get the optimal risky portfolio.

See also: Efficient frontier, Indifference curve, Capital Market Line

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