A margin user has a proportion 1.3 invested in the risky portfolio that has .4 in A with an expected return of 14%; .6 in B with an expected return of 18%. If the riskfree rate is 5%, her expected return is

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Quizplus · Accepted Answer

First, calculate the expected return of the risky portfolio: $E(R_p) = 0.4(14\%) + 0.6(18\%) = 5.6\% + 10.8\% = 16.4\%$.Then, calculate the expected return for the margin user who has a proportion of 1.3 invested in the risky portfolio: $E(R) = 1.3(16.4\%) + (1 - 1.3)(5\%) = 21.32\% - 1.5\% = 19.82\%$.Rounded to one decimal place, the expected return is 19.8%.

A Margin User Has a Proportion 1