The answer is B. Can you help me solve the problem all the way through? 6. You i

Question

The answer is B. Can you help me solve the problem all the way through?

6. You invest $200 in a risky asset with an expected rate of return of 15% and a standard deviation of 15% and a T bill with a rate of return of 5%. A portfolio that has an expected outcome of $240 is formed by a. borrowing $50 at the risk-free rate and investing the total amount in the risky asset. b. borrowing $100 at the risk-free rate and investing the total amount in the risky asset. c. investing S50 in the risky asset and the rest in the riskless asset. d. investing S100 in the risky asset and the rest in the riskless asset

Explanation / Answer

Investment Value = 200

Expected return of risky assets = 15%

Expected outcome = $240.

Expected return = ($240 / $200) - 1

= 1.20 - 1

= 20%

Expected retunr is 20%.

Expected return is more than expected return of risky portfolio. So investor has to borrow at risk free rate and invest in risky assets to earn required return.

Total dollar return = $40.

So, investor has to borrow $100 at risk free rate and invest in risky assets to earn required return.

After borrowing Total value of investment = $200 + $100

= $300

Dollar Return on investment = $300 × 15%

= $45.

$ is paid as interest on risk free borrowing and remaining $40 is required return.

Option (B) is correct answer.

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