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2 December, 11:52

Richard has $500.00 to invest, but he is willing to borrow money to increase the size of his investment. How much should Richard borrow to construct a portfolio with an expected return of 8% if the risk-free rate is 3% and the expected return of the optimal portfolio is 7%? a. $50.00 b. $100.00 c. $125.00 d. $375.00 e. $625.00

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  1. 2 December, 12:39
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    c. $125.00

    Explanation:

    Let us assume the x for invested in portfolio

    Invested proportion * expected return of the optimal portfolio + (1 - invested proportion) * risk free rate = expected return

    x * 7% + (1 - x) * 3% = 8%

    7% x + 3% - 3% x = 8%

    4% x = 5%

    X = 1.25

    Now the invested amount would be

    = 1.25 * $500

    = $625

    So, the borrowed amount would be

    = $625 - $500

    = $125
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