Question

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a(n)6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange-traded fund (ETF)with a 10% expected return and a 20% volatility. Assume that the ETF you invested in returns -10%. Then the realized return on your investment is closest to ________.

A)-18%
B)-10%
C)-23%
D)-26%

Answer 1

D)-26%

Step-by-step explanation:

The computation of the realized return on your investment is shown below:

= (Rate of return × total investment) - (interest paid)

= (-10% × $20,000) - (6% × $1,000)

= (-$2000 - $600)

= -$2,600

Now the Rate of return is

=(-$2,600 ÷ $10,000)

= -26%

hence, the realized return on your investment is -26%

Therefore the correct option is D.