A risk-free asset is available at 5% interest.Another asset is available with a mean rate of return of 15% but with a standard deviation of 5%.An investor is considering an investment portfolio consisting of some of each stock.On a graph with standard deviation on the horizontal axis and mean on the vertical axis, the budget line that expresses the alternative combinations of mean return and standard deviation possible with portfolios of these assets is a straight line with
A)slope 2.
B)slope -3.
C)increasing slope as you move left.
D)slope -1.
E)slope -1/3.

Question

Quizplus · Accepted Answer

The slope of the budget line on a graph with standard deviation on the horizontal axis and mean return on the vertical axis, when combining a risk-free asset and a risky asset, is determined by the risk premium (the difference between the mean return of the risky asset and the risk-free rate) divided by the standard deviation of the risky asset. In this case, the risk premium is 15% - 5% = 10%, and the standard deviation of the risky asset is 5%. Therefore, the slope is 10%/5% = 2.

A Risk-Free Asset Is Available at 5% Interest