Investments, tenth edition

 The Optimal CAL 

 It is instructive to superimpose on the graph of the efficient frontier in  Figure 7A.2  the CAL 

that identifies the optimal risky portfolio. This CAL has a slope equal to the Sharpe ratio of 

 Figure 7A.2 

Efficient frontier and CAL for country stock indexes  

.0900

.0800

.0700

.0600

.0500

.0400

.0300

.1000

.1200

.1400

.1600

.1800

.2000

.2200

.2400

Standard Deviation

Risk Premium

Risk Premium SD

Slope

Efficient Pf

No short

No short

Min. Var pf

0.0564

0.0575

0.0383

0.0540

0.1374

0.1401

0.1132

0.1350

0.4107

0.4104

0.3386

0.3960

Eff Frontier — No Short sales

Efficient Frontier

Capital Allocation Line

bod61671_ch07_205-255.indd   248

bod61671_ch07_205-255.indd   248

6/18/13   8:12 PM

6/18/13   8:12 PM

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7

  Optimal Risky Portfolios 

249

  APPENDIX B: Review of Portfolio Statistics 

  We base this review of scenario analysis on a two-asset portfolio. We denote the assets 

 D  and  E  (which you may think of as debt and equity), but the risk and return parameters 

we use in this appendix are not necessarily consistent with those used in Section 7.2.