What return should be expected from investing in the market portfolio which is expected to yield 18% if the investment includes all of the investor's funds plus 100% of additional funds borrowed at the risk-free rate of 6%?
A)18.6%
B)19.6%
C)21.6%
D)30.0%

Question

Quizplus · Accepted Answer

The expected return is calculated as: (1 + leverage) * market return - leverage * risk-free rate. With 100% leverage, it becomes 2 * 18% - 1 * 6% = 30%.

What Return Should Be Expected from Investing in the Market