Question
You have just decided upon your capital allocation for the rest of the year, say investing 25% in the risk free money market (T-bills) and
You have just decided upon your capital allocation for the rest of the year, say investing 25% in the risk free money market (T-bills) and 75% in the risky capital market, when you realize that you were too optimistic about the risky capital market assetis return: while your estimate of its risk (standard deviation) was sound, you over-estimated its expected return. Will you adjust your capital allocation decision by increasing, decreasing, or leaving unchanged your allocation to the risk-free T-bills? Please draw the Capital Allocation Line (CAL) to answer this question.
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