For an investor using margin with a riskfree rate of 6% and a risky portfolio with expected return of 14% and standard deviation of 10%, the resulting expected return and standard deviation would be

Question

Quizplus · Accepted Answer

To calculate the resulting expected return and standard deviation when using margin, we need to use the following formulas:

Expected Return = Riskfree Rate + (Margin Level * (Expected Return of Risky Portfolio - Riskfree Rate))

Standard deviation = Margin Level * Standard Deviation of Risky Portfolio

Plugging in the given values:

Expected Return = 6% + (1 * (14% - 6%)) = 14%

Standard deviation = 1 * 10% = 10%

Therefore, the answer is (C), with an expected return of 18% and a standard deviation of 14%.

For an Investor Using Margin with a Riskfree Rate of 6