Use the information for the question(s)below.
Tom's portfolio consists solely of an investment in Merck stock.Merck has an expected return of 13% and a volatility of 25%.The market portfolio has an expected return of 12% and a volatility of 18%.The risk-free rate is 4%.Assume that the CAPM assumptions hold in the market.
-Assuming that Tom wants to maintain the current volatility of his portfolio,then the amount that Tom should invest in the market portfolio to maximize his expected return is closest to:
A)72%.
B)92%.
C)110%.
D)139%.

Question

Quizplus · Accepted Answer

To maintain the same volatility of 25% while maximizing expected return, Tom should invest 139% in the market portfolio and borrow 39% at the risk-free rate. This leverages the market portfolio to match the volatility of Merck stock.

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