Asked by Reveti Kuche on Apr 29, 2024
Verified
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.
Expected Return
The anticipated gain or loss for an investment over a given period, often expressed as a percentage.
Standard Deviation
A gauge for the degree of spread or discrepancy in a series of data points.
- Interpret the budget line in portfolio analysis concerning expected return and standard deviation.
Verified Answer
MK
Minoti KapurApr 29, 2024
Final Answer :
A
Explanation :
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.
Learning Objectives
- Interpret the budget line in portfolio analysis concerning expected return and standard deviation.
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