Question: 3. What is the expected return and risk if you decide to borrow 100% from the bank and invest in the Sharpe Ratio Portfolio with

3. What is the expected return and risk if you decide to borrow 100% from the bank and invest in the Sharpe Ratio Portfolio with a 200% weight. The bank will loan you money at 7% interest.

Hint: Conceptually, if you have $1mm, you borrow $1mm from the bank. Now you can invest $2mm. A $2mm investment is 200% of your equity ($1mm). 1yr from now, you would owe the bank $70m (7% interest) on the loan they gave you.

Structurally you are investing in the Sharpe Ratio portfolio with a 200% weight and the constant 7% loan rate with a -100% weight. The weights always add up to 100%.

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