Suppose that Fenner Smith of Workouts must divide his portfolio between two assets, one of which gives him an expected rate of return of 10% with zero standard deviation and one of which gives him an expected rate of return of 25% and has a standard deviation of 5%.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)1.50.
B)-1.50.
C)-3.
D)3.
E)4.50.

Question

Suppose that Fenner Smith of Workouts  must divide his portfolio between two assets, one of which gives him an expected rate of return of 10% with zero standard deviation and one of which gives him an expected rate of return of 25% and has a standard deviation of 5%.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)1.50.
B)-1.50.
C)-3.
D)3.
E)4.50.

Quizplus · Accepted Answer

The slope of the budget line can be calculated as follows:

Slope = (Expected return of asset with 25% return - Expected return of asset with 10% return) / (Standard deviation of asset with 25% return - Standard deviation of asset with 10% return)
Slope = (25% - 10%) / (5% - 0%)
Slope = 3

Therefore, the slope of the budget line is 3. The best choice for Fenner Smith would be to choose the portfolio with the highest expected return while staying within his acceptable level of risk. This would be a portfolio that would lie on the budget line with the highest possible expected return, given his risk tolerance.

Suppose That Fenner Smith of Workouts Must Divide His