What is the Capital Allocation Line (CAL)? How do indifference curves inform positioning along the CAL?...

What is the Capital Allocation Line (CAL)? How do indifference curves inform positioning along the CAL? Explain the risk aversion metric employed in utility modeling? What is the (approximate) range?

Expert Solution

1) Capital Allocation Line -

The capital allocation line (CAL) is a line created on graph of all possible combinations of risk-free and risky assets. The graph displays the return investors might earn by assuming a certain level of risk with their investment. The slope of the CAL is known as the reward-to-variability ratio.

2) We have the indifference curves for the investor, namely, I1, I2, and I3. The efficient frontier is what the investor can invest in. Any portfolio below it is not preferred and any portfolio above it is not attainable. Therefore, there is no portfolio that is attainable on indifference curves I2 and I3. There is only one portfolio that meets his utility indifference curve, I1, and that is portfolio N. In this situation, portfolio N will be the optimal portfolio for the investor.

3)

Expected utility is exactly such a model. According to expected utility, a person has a utility function that assigns a “utility” to each outcome.The concept of risk aversion is typically applied when a person is choosing between lotteries where the outcomes are expressed in monetary amounts.

4) Range - between 1 & 4

jeff jeffy answered 2 years ago

what are the differences between the Capital Allocation Line (CAL) and Security Market Line (SML)? How...

what are the differences between the Capital Allocation Line (CAL) and Security Market Line (SML)? How could we use them? Please provide examples.

Explain the capital allocation line (CAL). Discuss as an analyst, how will you choose CAL based...

Explain the capital allocation line (CAL). Discuss as an analyst, how will you choose CAL based on the risk tolerance of your clients (investors)?

3) What are indifference curves and how do they relate to a budget line? Draw a...

3) What are indifference curves and how do they relate to a budget line? Draw a graph showing 3 indifference curves and a budget line. Why is one indifference curve tangent to the budget line? What happens if the price of one good changes? (15 points). please give all three graphs.

“Capital allocation line (CAL) must always be a straight line” – Is this statement true? Explain...

“Capital allocation line (CAL) must always be a straight line” – Is this statement true? Explain with examples

Investors would dislike a steeper-sloping Capital Allocation Line(CAL)”. A.True B.False

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Q 7 (a) What are indifference curves? (b) State and explain the properties of indifference curves. (c) Explain what factors could cause shift in the budget line.

What is the equation of Bo's capital allocation line?

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With quasilinear preferences, the slope of indifference curves is constant along all rays through the origin.

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