Suppose that Fenner Smith must divide his portfolio between two assets, one of which gives him an expected rate of return of 15% with zero standard deviation and one of which gives him an expected rate of return of 45% and has a standard deviation of 15.He can alter the expected rate of return and the variance of his portfolio by changing the proportions in which he holds the two assets.If we draw a "budget line" with expected return on the vertical axis and standard deviation on the horizontal axis, depicting the combinations that Smith can obtain, the slope of this budget line is
A)2.
B)1.
C)-1.
D)-2.
E)3.

Question

Quizplus · Accepted Answer

The slope of the budget line between two assets in a portfolio is calculated by taking the difference in their expected returns and dividing it by the difference in their standard deviations. In this case, the standard deviation of the first asset is 0, making the denominator of the slope calculation the standard deviation of the second asset, which is 15. The numerator is the difference in expected returns, 45% - 15% = 30%. Therefore, the slope is 30%/15% = 2.

Suppose That Fenner Smith Must Divide His Portfolio Between Two