CAL CML efficient frontier question

CFA Level II Portfolio Management
#1

In the second afternoon mock of CFAI itemset: Shah, the question regarding the following response:

Another board member, Kala Amato, notes that no part of the pension portfolio is invested in a risk-free asset. She wants to know the impact of combining the current portfolio with an investment in a risk-free asset.

In response, Shah states: “If we combine our portfolio with an investment in a risk-free asset, the result will be a new linear efficient frontier that is referred to as the capital allocation line (CAL), or the capital market line (CML). The risk and return of the resulting new portfolio will be linear combinations of the risk and return of the risk-free investment and our portfolio.” 3.) In his response to Amato, Shah is most likely correct with respect to the: A. risk and return of the new portfolio. B. CAL and the CML. C. new efficient frontier. Answer = A

Isn’t the new linear line the CAL? or CML if it is the market portfolio, and if the CAL is more efficient than any portfolio on the “efficient frontier” does it not become the new efficient frontier?

Thanks.

#2

CAL is the risk-return trade off of the risk free asset and a risky portfolio, so that is correct.

CML is the risk-return trade off between the risk free asset and the market portfolio, so that is not correct.

#3

A CAL is not necessarily a new efficient frontier; the only CAL that creates a new efficient frontier is the CML.

Take a look at this article I wrote on this; it may help: http://financialexamhelp123.com/cal-vs-cml-vs-sml/.

#4

Magician I have to say your article on this is yet the most clear explanation on the topic. Thank you!