" The CAL is tangent to the effieicnt frontier of risky assets"
Can someone explain the relationship between the CAL line and the effieicnt frontier?
When I looke at the graph on page 401 of the curriculum, it shows that the CAL touches the effieicnt frontier, but does it only touch when it is 100% of the security? what if its 50% risk free? Will it still be tangent and at what point?
Maybe this article that I wrote will help clear things up: http://financialexamhelp123.com/cal-vs-cml-vs-sml/.
CAL itself is an efficient frontier (top part of your minimal variance curve). CAL is an extension of your normal efficient frontier with the addition of RF intruments. As you are allow to borrow/lend at RF rate, your normal efficient frontier, which contains portfolios with only risky assets, become CAL and at any point on your CAL contains a combination of portfolio A with risky assets and RF instruments.
And to answer your question, yes, the CAL only touches your normal efficient frontier at 100% of portfolio with risky assets and 0% of RF assets. As you move up and down along your CAL, you get different combinations of the 2 (depends on your individual IC, or risk tolerance), which are not achievable by your normal efficicient frontier (lies below CAL).
Some important takeaways are:
CAL and CML only consist of efficient portfolios while SML does not have that limitation.
CAL and CML are based on TOTAL RISKs while SML is based on systematic risk (Beta)
The slope of CAL is sharpe ratio (again, measure of return per unit of TOTAL Risk) while the slope of SML is your market premium.
Any point under your efficient frontier or CAL contains inefficient portfolios while any point under your SML means that the security is overvalued (at the same level of systematic risk, you get less return)
CML is special case of CAL when everyone has the same expectations about market. And the tangent point is your market portfolio.