Your client invests in $10,000 in aT-bill with rate of return of 5% and a risky

Question

Your client invests in $10,000 in aT-bill with rate of return of 5% and a risky asset with an expected rate of return of 1196 and a variance of 496" He wants a portfolio that has an expected outcome of $11,500. The portfolio can be formed by Select one: O a. Investing $6,700 in the risky asset and $3,300 in the riskless asset. O b. Borrowing $6,700 at the risk-free rate and investing $6,700 in the risky asset Oc. Borrowing $6,700 at the risk-free rate and investing $16,700 in the risky asset. O d. Investing $10,000 in the risky asset.

Explanation / Answer

c.Borrowing $6700 ath the risk free rate and investing 16700 in the risky asset

(A) Cost of borrowing at risk free rate = $6700 x 5% = $335

(B) Returns on investing inthe risky asset = $16700 x 11% = $1837

Net returns = (B)- (A) = $1502

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