Problem 1 (Portfolios and risk-free borrowing) Suppose you have $10,000 in cash

Question

Problem 1 (Portfolios and risk-free borrowing)

Suppose you have $10,000 in cash and you decide to borrow another $10,000 at a 6% interest rate to invest in the stock market. You invest the entire $20,000 in an exchange traded fund (ETF) with a 12% expected return and a 20% volatility.
(a) The expected return on your investment is closest to:

(1) 18%
(2) 20%
(3) 12%
(4) 24%

(b) The volatility of your investment is closest to:

(1) 40%
(2) 20%
(3) 30%
(4) 24%






(c) Assume the ETF you invested in returns -10%, then the realized return on your total investment is closest to:

(1) -20%
(2) -10%
(3) -24%
(4) -26%

Explanation / Answer

(a) The expected return on your investment is closest to: (1) 18% 12% expected return, now if you consider volatility and calculate what the expected return , a volatility of 20% is added, closest answer is 18% (b) (2) 20% Volatility will not change and remain constant. (c) (3) -24% if ETF you invested in returns -10%, reducing 20% volatility and also u dont get the 12% return so we calculate net loss.. closest term is 24% PLEASE RATE

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