A risk-free asset is available at 5% interest. Another asset is available with a

Question

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: (show work or explain)

(a) a straight line with slope 2.

(b) a straight line with slope -3.

(c) a straight line with increasing slope as you move left.

(d) a straight line with slope -1.

(e) a straight line with slope -1/3.

Explanation / Answer

Slope = (15-5)/5 = 10/5 = 2

ans is

a) a straight line with slope 2.

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