You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.21 and a T-bill with a rate of return of 0.045. A portfolio that has an expected outcome of $114 is formed by
A) investing $100 in the risky asset.
B) investing $80 in the risky asset and $20 in the risk-free asset.
C) borrowing $46 at the risk-free rate and investing the total amount $146 in the risky asset.
D) investing $43 in the risky asset and $57 in the risk-free asset.
E) Such a portfolio cannot be formed.

Question

Quizplus · Accepted Answer

The expected outcome of $114 from an initial investment of $100 implies a 14% return. Option C, borrowing at the risk-free rate and investing a larger amount in the risky asset, is a strategy that can potentially amplify returns to meet the desired outcome, given the higher expected rate of return of the risky asset compared to the risk-free rate.

You Invest $100 in a Risky Asset with an Expected