Question

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

Answer 1

c. $125.00

Step-by-step 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