Capital Allocation Line

CFA Level I Portfolio Management
#1

I’ve met this question from Schweser Notes:

The capital allocation line is a straight line from the risk-free asset through the:

A. global maximum-return portfolio

B. optimal risky portfolio

C. global minimum-variance portfolio

The answer given by the Notes is B.

However, let me quote this from the Curriculum: ‘In other words, a combination of the risk-free asset and a risky asset can result in a better risk–return trade-off than an investment in only one type of asset because the risk-free asset has zero correlation with the risky asset. The combination is called the capital allocation line’ . So this means CAL is defined as the combination of a risk-free asset and a risky asset (portfolio).

Therefore, I think C should also be a correct answer.

Am I correct? Can anyone please help me with this?

Thanks a lot.

#2

None of the answers is correct. The author of the question confused the CAL with the CML.

Welcome to the world of third-party prep providers.

#3

So in terms of CML, B should be the correct answer, shouldn’t it?

And I agree with you but is it correct to say that the straight lines from the risk-free asset through optimal risky portfolio and through global minimum-variance portfolio are both CAL?

#4

If the question asked about the CML, then B is the correct answer.

Yes.

A straight line through the risk-free asset and _ any _ risky asset is a CAL for that risky asset. But not all CALs go through the global minimum-variance portfolio; only one does.