Table 8.3
Consider the following two securities X and Y.
-Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk-free rate and invest your borrowings in asset X?
A) 15.0%
B) 22.5%
C) 25.0%
D) 27.5%

Question

Table 8.3
Consider the following two securities X and Y. 
-Using the data from Table 8.3, what is the portfolio expected return if you invest 100 percent of your money in X, borrow an amount equal to half of your own investment at the risk-free rate and invest your borrowings in asset X?
A) 15.0% 
B) 22.5% 
C) 25.0% 
D) 27.5%

Quizplus · Accepted Answer

The expected return on the portfolio is calculated by leveraging the investment in asset X. If you invest 100% in X and borrow an additional 50% at the risk-free rate to invest in X, the expected return is 1.5 times the return of X minus 0.5 times the risk-free rate. Assuming the return of X is 20% and the risk-free rate is 5%, the calculation is 1.5 * 20% - 0.5 * 5% = 27.5%.

Table 8.3 Consider the Following Two Securities X and Y