You want to buy $20,000 worth of shares in Tootsie Roll Industries Inc.on margin,but you only have $10,000 of your own money to invest.The remaining $10,000 is borrowed by issuing T-Bills; assume the cost of borrowing is the risk-free rate.The weight of Tootsie Roll Industries in your portfolio is 2.0.The weight of T-Bills in your portfolio is -1.0.Assume that the expected return on Tootsie Roll is 12% and the expected return on the risk free asset (T-Bills)is 5%.What is the return on your portfolio?
A) 17%
B) 18%
C) 19%
D) 20%
E) 21%

Question

Quizplus · Accepted Answer

E(k_p) = w₁E(k₁) + w₂E(k₂) + w_nE(k_n) E(k_p) = 2.0(.12) + -1.0(.05) = .19

You Want to Buy $20,000 Worth of Shares in Tootsie