Suppose that Fenner Smith of Workouts Problem 13.2 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

Question

Quizplus · Accepted Answer

The slope of the budget line is calculated as the change in expected return divided by the change in standard deviation. Here, the change in expected return is 25% - 10% = 15%, and the change in standard deviation is 5% - 0% = 5%. Thus, the slope is 15% / 5% = 3.

Suppose That Fenner Smith of Workouts Problem 13