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 10.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 combination that Smith can obtain, the slope of this budget line is
A)1.50.
B)-1.50.
C)-3.
D)3.
E)4.50.

Question

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 10.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 combination that Smith can obtain, the slope of this budget line is
A)1.50.
B)-1.50.
C)-3.
D)3.
E)4.50.

Quizplus · Accepted Answer

The slope of the budget line between two assets in a portfolio is calculated by the difference in their expected returns divided by the difference in their standard deviations. Since one asset has a standard deviation of zero, the slope is simply the difference in returns (45% - 15%) divided by the standard deviation of the risky asset (10%), which equals 3.

Suppose That Fenner Smith Must Divide His Portfolio Between