You approach your broker to borrow money against securities held in your portfolio. Even though the loan will be secured by the securities in your portfolio, the broker's rate for lending to customers is 5 percent. Assuming a risk-free rate of 4 percent and an expected market return of 11 percent with a standard deviation of 15 percent, draw the capital market line related to your investment opportunities. b. Estimate your expected return and risk if you invest 20 percent of your portfolio in the risk-free asset. What if you decide to borrow 20 percent of your initial wealth and invest the money in the market?
You approach your broker to borrow money against securities held in your portfolio. Even though the loan will be secured by the securities in your portfolio, the broker's rate for lending to customers is 5 percent. Assuming a risk-free rate of 4 percent and an expected market return of 11 percent with a standard deviation of 15 percent, draw the capital market line related to your investment opportunities. b. Estimate your expected return and risk if you invest 20 percent of your portfolio in the risk-free asset. What if you decide to borrow 20 percent of your initial wealth and invest the money in the market?
Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
Section: Chapter Questions
Problem 1PS
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1) a. You approach your broker to borrow money against securities held in your portfolio. Even
though the loan will be secured by the securities in your portfolio, the broker's rate for lending to
customers is 5 percent. Assuming a risk-free rate of 4 percent and an expected market return of 11
percent with a standard deviation of 15 percent, draw the capital market line related to your
investment opportunities.
b. Estimate your expected return and risk if you invest 20 percent of your portfolio in the risk-free
asset. What if you decide to borrow 20 percent of your initial wealth and invest the money in the
market?
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