Asked by Dillon Bannister on May 28, 2024
Verified
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 ________.
A) invest $125,000 in the risk-free asset
B) invest $375,000 in the risk-free asset
C) borrow $125,000
D) borrow $375,000
Risk-free Rate
The theoretical rate of return of an investment with zero risk, often represented by Treasury bills.
Borrowing Rate
The interest rate or cost that a borrower pays to secure funds from a lender.
- Familiarize with and apply key financial benchmarks such as the Sharpe ratio, Capital Allocation Line (CAL), and acquire an understanding of the use of leverage in the management of portfolios.
Verified Answer
MF
Muhammed Furkan ?ahinMay 30, 2024
Final Answer :
D
Explanation :
y × .16 + (1 - y) × .08 = .22
.16 y - .08 y + .08 = .22
.08 y = .14
y = 1.75
Put 1.75 × $500,000 = $875,000 in the risky asset by borrowing $375,000.
.16 y - .08 y + .08 = .22
.08 y = .14
y = 1.75
Put 1.75 × $500,000 = $875,000 in the risky asset by borrowing $375,000.
Learning Objectives
- Familiarize with and apply key financial benchmarks such as the Sharpe ratio, Capital Allocation Line (CAL), and acquire an understanding of the use of leverage in the management of portfolios.
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