The budget line in portfolio analysis shows that:
A) the expected return on a portfolio increases as the standard deviation of that return increases.
B) the expected return on a portfolio increases as the standard deviation of that return decreases.
C) the expected return on a portfolio is constant.
D) the standard deviation of a portfolio is constant.
E) a riskless portfolio will earn a zero return.

Question

Quizplus · Accepted Answer

The budget line in portfolio analysis, often referred to as the capital allocation line (CAL) when involving a risk-free asset, illustrates the trade-off between risk (standard deviation) and return. It shows that as investors take on more risk, they expect a higher return to compensate for that risk. This is why the expected return on a portfolio increases as the standard deviation of that return increases.

The Budget Line in Portfolio Analysis Shows That