Suppose the expected return on a well diversified portfolio, P, of risky stocks is 15% and the return on the risk-free T-bill is 3%. The standard deviation of P is 30%.
Suppose that Mark borrows 40% of his wealth and invests his entire wealth plus the amount borrowed into the risky portfolio. Calculate the expected return and standard deviation of his portfolio if the interest rate on borrowing is 6%.
Draw the capital allocation line (CAL), from y = 0 to y = 2.