With the given information, Ito finds that the CAL of the S&P 500 is equal to the CAL of the MT portfolio if the return of the MT portfolio equals: A. 8.6%. B. 11.4%. C. 10.6%.
The CAL of the S&P 500 is 0.35 = (12 − 5) / 20. To find the return that gives this slope for the CAL, Ito would solve for R in the expression 0.35 = (R − 5) / 16. This gives 5.6 = R − 5, R = 10.6.
