In a world where riskless borrowing or lending is possible at 6%, if the expected return to the optimal risky asset portfolio is 12%, and you want a target return of 15%, what must you do?
A) Borrow an amount equal to 25% of your wealth and put 125% of your wealth in the risky portfolio.
B) Borrow an amount equal to 50% of your wealth and put 150% of your wealth in the risky portfolio.
C) Invest half your wealth in the risky portfolio and the other half in bonds.
D) Invest 75% of your wealth in risky assets and 25% in bonds.

Question

Quizplus · Accepted Answer

To achieve a target return of 15%, you need to leverage your investment by borrowing 50% of your wealth and investing 150% in the risky portfolio, given the risk-free rate is 6% and the risky portfolio's expected return is 12%.

In a World Where Riskless Borrowing or Lending Is Possible