CAPITAL ALLOCATION LINE

Capital Allocation Line – all the investors optimum portfolios will be made up of some combination
of an optimal portfolio of risky assets and the risk-free assets and the optimal risky asset portfolio is
referred to as the Capital Allocation Line.

The point X on the Capital Allocation Line represents a portfolio that is 40% invested in the risky
assets portfolio and 60% invested in the risk-free asset.

The capital allocation line helps the investor to choose how must to invest in risk free asset and how
much more in the risky assets. Asset allocation is the allocation is the allotment of funds across
different types of assets with various expected returns and risk levels.

capital allocation is the allocation of funds between risk-free assets, such as certain government
securities, and risky assets, such as Equities.

The slope of the Capital Allocation Lines measures the trade off between risk and return. The higher
slope indicated that the investor will receive highest expected return in exchange for taking the
highest levels of risk.
COMPONENTS OF THE INVESTMENT POLICY STANDARDS

Grounds of IPS

To form and build context regarding the investor’s source of wealth or from where they are able to
origin the wealth

To recognize and defining the investor

To identify the risk and manage it as per the structure.

To delegate the responsibilities and give the actual role of the portfolio manager.

To exercise the authority

Specify the responsibilities to determine, executing and monitoring the outcome of the investment
performance standards.

Assign responsibility for risk management monitor and report.

Assign the responsibility of the to determine the asset allocation patterns of the portfolio include the
inputs used and the criteria used to develop the inputs.

Describe the process related to review the IPS and updating it time to time with the facts.

Risk Return and the Objective of the Investment

To define the level of the risk tolerance of the investor.

Describe the overall investment objective

Stating the risk, Return and spending the assumptions taken into consideration while designing the
portfolio.

Taking in to consideration the constraints associated

Describe other considerations that will be relative to the investment strategy.

Forecasting and Evaluation of the Risks

Establish performance measurement and to report the accountability.

Developing the metrics used to measure and evaluate the risk.

Defining the process for portfolio rebalancing and to target the strategies for the allocation of assets.