Question 15

5 Points

1	B	C	D
2	Suppose the BORROWING rate that your client faces is	9.00%
3	Assume the expected return on the S&P Index is	13.00%
4	The standard deviation of the market is SDM		25.00%
5	The risk free rate of return on T-Bills is		5.00%
6
7	There is a range of risk aversion where your client will want to be [a] borrower [b] lender [c] neither.
8	The key factor is the Borrow Rate for your client versus the Risk Free Rate.
9
10	The model for y = (E(rm) - rf) / (VARm)		y = (E(rm) - Rf) / VARm
11
12	If the value of (y) > 1.0 then the client is a Borrower.
13	If the value of (y) < 1.0 then the client is a Lender
14	If the value of (y) = 1.0 then he is neither borrower nor lender
15
16	Use the model where rf = risk free rate and then again where rf = borrow rate of client.
17	What is the [y] value where rf = risk free rate? Are you a borrower or lender?

y = 2.28; borrow @5%

y = 1.28; borrow @5%

y = 1.82; borrow @5%

y = 0.28; Lend @5%