Q.8 Consider the following assets:

asset	Expected return	Standard deviation	Beta
Risk-free asset	0.06	0	0
Market portfolio	0.22	0.20	1
Stock E	0.24	0.25	1.25

An investor wants to earn 24%, which one of the following strategies is optimal? Explain why suboptimal strategies should not be chosen.

1. Borrow at the risk-free rate and invest in stock E because the risk free asset will offset some of the risk of stock E.
2. Borrow at the risk-free rate and invest in the market portfolio, even though this strategy is riskier than investing all of the available funds in the market portfolio.
3. Invest 100% of the available funds in stock E since its expected return is appropriate for its beta.
4. Invest 100% of the available funds in the market portfolio.