1. Interest on a margin loan is currently 4%, while term deposits at your bank pay 1%. You have $10,000 in cash to invest in an ETF tracking the ASX 200, which you believe has an expected return of 10% and a standard deviation of 20%.

If you want to construct a portfolio with an expected future value of $11,600, you will need to:

a. Borrow $1,600 and invest the total cash ($11,600) in the ETF

b. Invest $8,400 in the ETF and deposit $1,600 at the bank

c. Borrow $10,000 and invest the total cash ($20,000) in the ETF

d. Borrow $6,667 and invest the total cash ($16,667) in the ETF

e. Borrow $2,667 and invest the total cash ($12,667) in the ETF

2. All else held equal, the Sharpe Ratio of the optimal risky portfolio will be highest when

1. securities returns are uncorrelated.
2. securities returns are positively correlated.
3. the risk-free rate is low.
4. securities returns are negatively correlated.

a. III and IV

b. IV only

c. II only

d. III only

e. I only