Suppose that Fenner Smith of Workouts 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 55% 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 combinations that Smith can obtain, the slope of this budget line is
A)2.
B)-4.
C)4.
D)-2.
E)6.

Question

Quizplus · Accepted Answer

The slope of the budget line is calculated by taking the difference in the expected returns of the two assets and dividing it by the difference in their standard deviations. Since the first asset has a 0% standard deviation and the second asset has a 10% standard deviation, the difference in standard deviations is 10%. The expected returns are 55% and 15%, so the difference is 40%. The slope is 40% / 10% = 4.

Suppose That Fenner Smith of Workouts Must Divide His Portfolio