Amber Lawrence has $1,000,000 to invest and is considering two alternatives. She can buy a risk free asset that will pay 5% or she can invest in a stock that has a 0.5 chance of paying 10%, a 0.3 chance of paying 4%, and a 0.2 chance of providing a 2% return. Amber plans to invest $800,000 in the stock and $200,000 in the risk free asset.
a. Determine the expected percentage return on the stock and the standard deviation.
b. Calculate the weighted average return on the portfolio, given the planned investment strategy outlined above.
c. Determine the standard deviation for the portfolio.
d. Write the equation that represents the budget line in the risk-returned trade-off. What is the slope of the budget line? Interpret this slope.