Your father argues that he can make more money if he borrows money to invest in the
Question:
Your father argues that he can make more money if he borrows money to invest in the Hang Seng Index at a margin of 50%. Your father's utility function is UF = E(r) - AF2 , where AF = 2. Assume he can borrow at an interest rate of 0.5% per month. Also assume that he will not face any margin calls. Given your estimates from the historical returns, explain to him whether buying the Hang Seng Index on a 50% margin or investing in the Hang Seng Index without borrowing is a better strategy based on his utility function.
b) Can we conclude from the calculation in part (a) that all risk-averse investors would make the same choice (50% margin or no margin)?
- Risk-free rate = 0.09%
Management Accounting
ISBN: 9780730369387
4th Edition
Authors: Leslie G. Eldenburg, Albie Brooks, Judy Oliver, Gillian Vesty, Rodney Dormer, Vijaya Murthy, Nick Pawsey