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 _________.

1.040
0.25
0.50
0.80

Answer 1

The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately 0.5

Explanation:

given data

invested = $1000

rate of return = 16%

standard deviation = 20%

rate of return = 6%

to find out

The slope of the capital allocation line

solution

we know here rate of return equation for find slope of line that is

R1 = R2 + σ × slope of line .............1

here R is rate of return and and σ is standard deviation

put here all value in equation 1

16 = 6 + 20 × slope of line

20 × slope of line = 10

slope of line = 0.5

so

The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately 0.5