What return should be expected from investing in the market portfolio that is expected to yield 18% if the investment includes all of the investor's funds plus 30% of additional funds borrowed at the risk-free rate of 6%?
A) 18.6%
B) 19.6%
C) 21.6%
D) 24.0%

Question

Quizplus · Accepted Answer

This question requires us to calculate the expected return of a portfolio that includes all of the investor's funds and 30% of additional funds borrowed at the risk-free rate of 6%. To calculate the expected return of the portfolio, we need to use the following formula:

Expected return = (Weight of investment in market portfolio x expected return of market portfolio) + (Weight of investment in risk-free asset x risk-free rate)

In this case, the weight of investment in the market portfolio is 100%, since all of the investor's funds are invested in the market portfolio. The weight of investment in the risk-free asset is 30%, since the investor has borrowed 30% of additional funds at the risk-free rate of 6%.

Using the formula, we get:

Expected return = (1 x 18%) + (0.3 x 6%) = 19.8%

Therefore, the expected return from investing in the market portfolio is 19.8%. The closest answer choice is C, which is 21.6%. This is off by 1.8%, which could be due to rounding.

What Return Should Be Expected from Investing in the Market