Investments, tenth edition

     Asset Allocation with Two Risky Asset Classes 

 What if our risky assets are still confined to the bond and stock funds, but we can also 

invest in risk-free T-bills yielding 5%? We start with a graphical solution.  Figure 7.6  shows 

the opportunity set based on the properties of the bond and stock funds, using the data 

from  Table 7.1  and assuming that r 5 .3. 

  Two possible capital allocation lines (CALs) are drawn from the risk-free rate ( r  

 f 

   5  5%) 

to two feasible portfolios. The first possible CAL is drawn through the minimum-variance 

portfolio  A,  which is invested 82% in bonds and 18% in stocks ( Table 7.3 , bottom panel, 

last column). Portfolio  A ’s expected return is 8.90%, and its standard deviation is 11.45%. 

With a T-bill rate of 5%, its