Capital Allocation Line Calculator

Capital Allocation Line Calculator calculator can be used to determine the optimal mix of risky and risk-free assets in an investment portfolio based on expected return, risk-free rate, and asset return.

Input Parameters

Calculation Results

Capital Allocation Line Equation

E(Rp) = Rf + σp × [E(Rm) - Rf] / σm

Where:
E(Rp) = Expected Return of Portfolio
Rf = Risk-Free Rate
σp = Standard Deviation of Portfolio
E(Rm) = Expected Return of Market
σm = Standard Deviation of Market

Optimal Portfolio Weights

100% in Risk-Free Asset

Expected Portfolio Return

Equal to Risk-Free Rate

Capital Allocation Line Calculator Calculator Usage Guide

Learn how to use the Capital Allocation Line Calculator and its working principles

What is the Capital Allocation Line (CAL)?

The Capital Allocation Line (CAL) shows the risk-return combinations of all possible portfolios made up of a risky asset and a risk-free asset. It represents the optimal investment mix between risk-free and risky assets for investors with different risk tolerances.

How to Use This Calculator

  1. Enter your Risk-Free Rate (typically the yield on government bonds like Treasury bills)
  2. Enter the Expected Return of Risky Asset (historical average return of a stock or stock index)
  3. Enter the Risk (Standard Deviation) of Risky Asset (volatility or standard deviation of the risky asset returns)
  4. Click the Calculate button to see the Capital Allocation Line equation and optimal portfolio allocation

Understanding the Results

The calculator provides:

  • The Capital Allocation Line equation showing the relationship between expected return and risk (standard deviation) of different portfolio combinations
  • The optimal portfolio weights that maximize the Sharpe ratio (risk-adjusted return)
  • The expected return of the optimal portfolio

Practical Applications

This calculator helps investors:

  • Determine the most efficient mix of investments based on their risk tolerance
  • Understand the trade-off between risk and return in their investment portfolio
  • Make informed decisions about how much to invest in risky versus risk-free assets