What is the Capital Allocation Line？

The Capital Allocation Line (CAL) is a graphical representation of the risk-return tradeoff of a portfolio that includes a risk-free asset and a risky asset. It shows the expected return of a portfolio for each level of risk, where risk is measured by the standard deviation of the portfolio's returns. The CAL is a straight line that starts at the risk-free rate of return and slopes upward as the level of risk increases. The slope of the CAL is known as the Sharpe ratio, which measures the excess return earned per unit of risk taken. The CAL is used to determine the optimal portfolio for an investor based on their risk tolerance and investment objectives.