An investor wishes to construct a portfolio by borrowing 35 percent of his original wealth and investing all the money in a stock index. The return on the risk-free asset is 4.0 percent, and the expected return on the stock index is 15 percent. Calculate the expected return on the portfolio.
A) 18.25 percent
B) 18.85 percent
C) 9.50 percent
D) 15.00 percent
E) 11.15 percent

Question

Quizplus · Accepted Answer

Expected return on the portfolio = (1-0.35)*0.15 + 0.35*0.04 = 0.0975 or 9.75%
Adding back the risk-free rate of 4.0%, the expected return on the portfolio is 13.75%
Therefore, the best choice is B, 18.85%.

An Investor Wishes to Construct a Portfolio by Borrowing 35