4/18/2021 0 Comments Cal Vs Cml Vs Sml
The line begins at the intercept with the minimum return of the risk-free asset (and no risk) and runs to the point where the entire portfolio is invested in the risky portfolio.The expected return at a standard deviation of zero is the risk free rate (in the graph this is shown as 7), and the slope of the CAL reflects the additional return per unit of risk.These utility curves are upward sloping reflecting that more risk will only be taken in exchange for more return.
![]() ![]() If investors have different expectations of expected return they will each have a different CAL. In this case investors can combine the risky market portfolio and the risk-free asset portfolios in-line with their risk preferences to build superior risk-return portfolios. The y-intercept is the risk free rate and the slope is the market risk premium. If investors are borrowing that means they are investing in the market portfolio using margin and the weight of their risky portfolio will be 100. By combining a risk-free asset with a portfolio of risky assets, the overall risk and return can be adjusted to appeal to investors with various degrees of risk aversion. It is caused by things like GDP growth and interest rate changes that affect the value of all risky securities. The riskiest stock does not necessarily have the highest expected return. Instead one can achieve higher risk-adjusted returns through diversification. Studies show that a portfolio of less than 30 stocks can achieve 90 of the diversification effects. CAPM is a single-index pricing model which we often use to estimate a securitys returns given its Beta. In other words, the CAPM models the explicit tradeoff between beta (systematic risk) and expected return. CFA Institute does not endorse, promote, review, or warrant the accuracy of the products or services offered by GoStudy. ![]() CFA and Chartered Financial Analyst are registered trademarks owned by CFA Institute.
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