G You invest $1,000 in a risky asset with an expected rate of return of 0.17 and a standard deviation of 0.40 and a T-bill with a rate of return of 0.04. The slope of the capital allocation line formed with the risky asset and the risk-free asset is equal to A. 0.325. B. 0.675. C. 0.912. D. 0.407. E. Cannot be determined

Option A is correct.

Explanation:

Capital allocation line refers to investment/allotment of fund in different type of assets or financial securities/shares/stock having different rate of returns and level of risks. it is used by investors to compare rate of returns on risk free assets such as T-bills and risky assets like equity. The slope of Capital allocation line shows that the investor will expect high rate of return on risky assets and vice versa.

Slope of CAL formed with the risky assets and risk free assets is  = (Expected rate of return - Risk free assets rate of return) / Standard deviation of risky assets (a).

Taking data given in the question,

Expected rate of return = 0.17

Standard deviation of risky assets = 0.40

T- bill rate of return i.e. risk free assets= 0.04

Putting the values in above equation (a)

Slope of CAL formed with the risky assets and risk free assets is = (0.17 - 0.04) / 0.40 .

Slope of CAL formed with the risky assets and risk free assets is = 0.325.

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