Asked by Margarett Stuart on May 17, 2024
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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.
Risk-Free Asset
An investment with a guaranteed return and no chance of default, often used as a benchmark for the risk level of other investments.
Standard Deviation
A statistical measure that quantifies the amount of variability or dispersion of a set of data points or distribution from the mean.
Mean Rate
The average value of a set of rates, which could be interest rates, growth rates, or any other type of change measured over time.
- Apply the concept of budget lines to understand the trade-offs between expected return and risk in portfolio choices.
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Learning Objectives
- Apply the concept of budget lines to understand the trade-offs between expected return and risk in portfolio choices.
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