Question

assume that your initial margin must be higher than 90% when you borrow money. Which one of the following combinations of return and risk (SD) you CANNOT obtain by adjusting portfolio weights? d. (10.1%,13%) b. (8.4%,10.5%) a. (1.70%,1.0%) c. (3.10%,3.0%)

Answer 1

The correct answer is option a. The combination of return and risk that cannot be obtained by adjusting portfolio weights is option a, (1.70%, 1.0%).

Step-by-step explanation:

To determine the combination of return and risk that cannot be obtained by adjusting portfolio weights, we need to compare the return and risk values given in the options to the requirement that the initial margin must be higher than 90% when borrowing money. The initial margin represents the amount of equity a borrower must contribute to a loan, while the loan amount is determined by the leverage ratio. In this case, the leverage ratio must be less than 10% (initial margin higher than 90%).

1. For option a, (1.70%, 1.0%), the risk (standard deviation) is 1.0%, which is below the required leverage ratio. So this combination is not possible.
2. For option b, (8.4%, 10.5%), the risk (standard deviation) is 10.5%, which is above the required leverage ratio. So this combination is possible.
3. For option c, (3.10%, 3.0%), the risk (standard deviation) is 3.0%, which is below the required leverage ratio. So this combination is not possible.
4. For option d, (10.1%, 13%), the risk (standard deviation) is 13%, which is above the required leverage ratio. So this combination is possible.

Based on this analysis, the combination of return and risk that cannot be obtained by adjusting portfolio weights is option a, (1.70%, 1.0%).