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%.

Required:
1. The slope of the capital allocation line formed with the risky asset and the risk-free asset is approximately _________.
O 1.040
O .25 .
O .50
O .80

Answer 1

Slope of Line = 0.50

Step-by-step explanation:

Data provided as per the requirement of computing the slope of line is shown below:-

Expected rate of return = 16%

Treasury bill rate of return = 6%

Standard deviation = 20%

The calculation of slope of line is shown below:-

Expected rate of return = Treasury bill rate of return + Standard deviation × Slope of line

16% = 6% + 20% × Slope of Line

Slope of Line = (16% - 6%) ÷ 20

= 0.50

Therefore for computing the slope of line we simply applied the above formula.