You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should ________.
A) invest $125,000 in the risk-free asset
B) invest $375,000 in the risk-free asset
C) borrow $125,000
D) borrow $375,000

Question

Quizplus · Accepted Answer

y × .16 + (1 - y) × .08 = .22
.16 y - .08 y + .08 = .22
.08 y = .14
y = 1.75
Put 1.75 × $500,000 = $875,000 in the risky asset by borrowing $375,000.

You Have $500,000 Available to Invest