Assume that MM's perfect capital markets conditions are met and that you can borrow and lend at the same 5% rate as With.You have $5000 of your own money to invest and you plan on buying Without stock.Using homemade leverage,how much do you need to borrow in your margin account so that the payoff of your margined purchase of Without stock will be the same as a $5000 investment in With stock?

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Quizplus · Accepted Answer

To replicate the payoff of a $5000 investment in With stock using homemade leverage, you need to borrow an amount equal to your own investment, which is $5000. This allows you to double your investment in Without stock, mimicking the leverage effect of investing in With stock.

Assume That MM's Perfect Capital Markets Conditions Are Met and That