Quick quiz - match the numbers to the letters: 1) Security markets line 2) Capital allocation line 3) Capital markets line **************** a) plot of the expected return against variance of two-asset portfolio which combines the risk-free asset and the tangency portfolio to the minimum variance frontier b) plot of the expected return against beta, with an intercept at the risk-free rate and a slope equal to the equity risk premium, E(Rp) - Rf c) plot of the expected return against variance of two-asset portfolio which combines the risk-free asset and the market portfolio, where all investors have the same expectations about returns and risk.
- -b 2) -a 3) -c
1b 2c 3a
- b 2. a 3. c
B C A
BAC, and are you trying to send us some sort of subliminal message about BofA?
B C A
CAL = homegeneous expectations as against CML. Just a check on people who chose Bank of America ticker.
I remember that the other way around: CAL is the capital allocation line of some random investor and it’s different for another investor. CML is the CAL if all investors have homogeneous expectations. jankynoname, can we get the answers?
^Correct. I messed it up. grrrr! CAL = specific to investor and CML = unanimous So my ans is also BAC now.
naze you are correct. CAL :Possible risk/reward tradeoff given an expectation CML: Capital Market, i.e. the MARKET portfolio, same for all investors,
- B 2) A 3) C Answer op? Or we could just all look at our books =P
it’s definitely BAC… this was a good review- i knew the CML had a tangency portfolio to it so i mixed them up. CML- market portfolio is the tangency portfolio CAL- the risky portfolio is tangent to the min variance frontier of risky assets so many little things to remember. so little time. good review janky. keep these coming. i’ll mess them up more often than not.
Sorry guys… haven’t been able to check in all day. Correct answer is BAC And yes, it was a hint about a good stock to short. Nice work guys!