This problem is about pension fund management. It is to be noted that the best Feasible Capital Allocation Line (CAL) is: 0.3162.
<h3>
What is Capital Allocation Line (CAL)?</h3>
A graph's capital allocation line depicts all conceivable combinations of risky and risk-free assets, allowing investors to estimate future returns depending on risk.
<h3>
What is the calculation for the above solution?</h3>
It is to be noted that the optimal risky portfolio's stock percentage is determined by:
Weight of Stock = ((Return on Stock - Risk Free Rate) * Variance of bond) - ((Return on Bond - Risk Free Rate) * Co-Variance of bond & Stock)/ ((Return on Stock - Risk Free Rate) * Variance of bond + (Return on Bond - Risk Free Rate) * Variance of Stock - ((Return on Bond - Risk Free Rate + Return on Stock - Risk Free Rate + ) * Co-Variance of bond & Stock)
→ The weight of stock
= ((15% - 5.5%) * 529) - ((9% - 5.5%) * 110.40)/ ((15% - 5.5%) * 529) + (9% - 5.5%) * 1,024 - ((15% - 5.5% + 9% - 5.5%) * 110.40)
= [(50.255) * (3.864) /(50.255) + (46.08) - (14.352)]
Weight of Stock = 0.646628
Weight of Bonds = 1 - 0.646628
Weight of Bonds= 0.353372
Expected return of portfolio = 0.646628 * 15% + 0.353372 * 9%
= 12.88%
Standard Deviation of Portfolio (SDP)= (0.6466282² * 1,024 + 0.3533722² * 529 + 2 * 0.646628* 0.353372* 110.40)⁰·⁵
SDP = (544.67)⁰·⁵
SDP = 23.34%
Hence,
Best feasible CAL = (12.88% - 5.5%)/ 23.34%
Best feasible CAL = <u>0.3162</u>
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