You approach your broker to borrow money against securities held in your portfol

Question

You approach your broker to borrow money against securities held in your portfolio. Even though the loan will be secured by the securities in your portfolio, the broker's rate for lending to customers is 6.5 percent. Assuming a risk-free rate of 3 percent and an expected market return of 10 percent with a standard deviation of 17.5 percent, draw the capital market line related to your investment opportunities. Estimate your expected return and risk if you invest 30 percent of your portfolio in the risk-free asset. What if you decide to borrow 30 percent of your initial wealth and invest the money in the market?

Explanation / Answer

You approach your broker to borrow money against securities held in your portfol

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