[Verse 1] Picture this, you're standing at the start Risk-free bonds in one hand, stocks within your heart Treasury bills are safe but returns are low Risky assets dance, but which way will they go? You don't have to choose just one side of the game Mix them both together, optimization's the name [Chorus] Capital Allocation Line, CAL shows the way Risk-free rate plus risk premium, that's how portfolios pay Higher risk means higher return, if you dare to climb Capital Market Line, CML, efficient every time Mix and match, find your path On the line that's built to last [Verse 2] Start with T-bills at zero risk today Then add some market portfolio into the fray The line connects these points across the chart Slope shows reward for risk, that's financial art Every point upon this line is optimal and true Choose your risk tolerance, the line will guide you through [Chorus] Capital Allocation Line, CAL shows the way Risk-free rate plus risk premium, that's how portfolios pay Higher risk means higher return, if you dare to climb Capital Market Line, CML, efficient every time Mix and match, find your path On the line that's built to last [Bridge] Borrow at the risk-free rate if you want more Leverage amplifies returns but risk grows more and more Lend at risk-free rate if safety's your desire Balance risk and return, climb as high as you aspire [Verse 3] CML's the special case when markets are complete All investors hold the same portfolio so neat Market portfolio combined with lending or borrowing Creates the line that guides us through tomorrow's promising Tangent to efficient frontier, touching at one spot This is modern portfolio theory, connect every dot [Chorus] Capital Allocation Line, CAL shows the way Risk-free rate plus risk premium, that's how portfolios pay Higher risk means higher return, if you dare to climb Capital Market Line, CML, efficient every time Mix and match, find your path On the line that's built to last [Outro] From safe to risky, find your place Upon the line, set your pace Capital allocation, market's creation Building wealth through optimization
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