The Capital Allocation Line (CAL)

For a two-asset portfolio, an analyst collects the risk-free asset's expected return and the risky asset's expected return. In order to construct the capital allocation line (CAL), information still needed to be collected is _best described_ as the:

Incorrect. The risk-free asset is a riskless asset that results in zero standard deviation.

Correct. The risky asset's standard deviation is needed in order to plot the capital allocation line. With the risky asset's expected return and the risk-free rate, the analyst can determine the slope of the capital allocation line, which is represented by the provided expression. This also represents the market price of risk. $$\displaystyle \frac{E(R_i)-R_f}{\sigma_i}$$ The capital allocation line crosses the _y_-axis at the risk-free rate.

Incorrect. Although correlation between the expected returns on the risk-free asset and the risky asset is zero, correlation information is not required in order to construct the CAL.

risky asset's standard deviation.

risk-free asset's standard deviation.

correlation between the expected returns on the risk-free asset and the risky asset.