Question

6)

You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________.

Multiple Choice

• invest $125,000 in the risk-free asset

• invest $375,000 in the risk-free asset

• borrow $125,000

• borrow $375,000

  You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should _________.

  Multiple Choice

• invest $125,000 in the risk-free asset

• invest $375,000 in the risk-free asset

• borrow $125,000

• borrow $375,000

Answer 1

- Total Investment to make = $500,000

Risk Free rate return(Rf) = 8%

Return on Risky Asset(RA) = 16%

Return you wish to earn = 22%

Let amount invested in risk free rate be X

& the amount invested in Risky Asset be (1-X)

calculating the weights:-

Return of Portfolio = (Weight of Rf)(Rf) + (Weight of RA)(RA)

22% = (X)(8%) + (1-X)(16%)

22% = X*8% + 16% - X*16%

6% = -X*8%

X = -0.75

Weight of risk Free = $500,000*(-0.75) = -$375,000

It measn that you should borrow $375,000 and invest the Total amount in risky asset

Option 4. borrow $375,000

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