Question

You invest $1,000 in a complete portfolio. The complete portfolio is composed of a risky asset with an expected rate of return of 16% and a standard deviation of 20% and a Treasury bill with a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.
Multiple Choice
a. 1
b. .040
c. .80
d. .50
e. .25

Answer 1

Answer:

d. .50

Explanation:

You invest $1,000. The complete portfolio is conformed by a set of risky assets with an expected return of 16% and a standard deviation of 20%. Considering, too, that the Treasury bill has a rate of return of 6%. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately 0.50.

E R c= Rf + \sigmac * Slope of Line

16 = 6 + 20* Slope of Line

Slope of Line = (16-6)/20

Slope of Line = 0.50