Given that the risk-free rate of interest is 6%, the market portfolio offers an expected return of
Question:
Given that the risk-free rate of interest is 6%, the market portfolio offers an expected return of 14% for a standard deviation of 24%.
a) if Pedro has as little as M1 000 to invest and desires an expected return of 20%. Show how he can achieve this by a combination of borrowing and investing in the market portfolio and calculate the standard deviation of his final portfolio.
b) if Petro is very averse to the M1000 he wants to invest and that he will tolerate a maximum standard deviation of 6%. Show how he can achieve this by a combination of lending at the risk-free rate and investing in the market portfolio and calculating the return for his final investment.
Fundamentals of Investments
ISBN: 978-0132926171
3rd edition
Authors: Gordon J. Alexander, William F. Sharpe, Jeffery V. Bailey