Asked by Allie Andrews on Jun 30, 2024
Verified
The slope of the budget line that expresses the tradeoff between risk and return for an asset can be represented by:
A) (Rf - Rm) /σm.
B) (Rm - Rf) /σm.
C) Rm - Rf.
D) b.
Slope of the Budget Line
The rate at which a consumer can trade off one good for another while maintaining the same level of utility, representing the relative prices of two goods.
Risk
The possibility of loss, damage, or any other undesirable event.
Return
The profit or loss derived from an investment over a particular period, expressed either in percentage or absolute terms.
- Analyze the budget line's significance regarding expected returns and standard deviation in the context of portfolio analysis.
Verified Answer
SS
Simranjeet SinghJul 06, 2024
Final Answer :
B
Explanation :
The slope of the budget line is represented by the change in the return of the asset (Rm - Rf) divided by the standard deviation of those returns (σm), as the risk-return tradeoff is measured by the standard deviation of returns. Option B is the only one that represents this formula correctly.
Learning Objectives
- Analyze the budget line's significance regarding expected returns and standard deviation in the context of portfolio analysis.
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