Suppose you have $400,000 in cash, and decide to borrow another $100,000 at a 5% interest rate

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Suppose you have $400,000 in cash, and decide to borrow another $100,000 at a 5% interest rate to invest in the stock market. You invest the entire $500,000 in a portfolio J with a 24% expected return and a 35% volatility.
(a) What is the expected return of this investment?
(b) What is the realized return if J goes up 40% over the year?
(c) What is the realized return if J falls by 40% over the year?

Expected Return
The expected return is the profit or loss an investor anticipates on an investment that has known or anticipated rates of return (RoR). It is calculated by multiplying potential outcomes by the chances of them occurring and then totaling these...
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...
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Corporate Finance

ISBN: 978-0133097894

3rd edition

Authors: Jonathan Berk and Peter DeMarzo

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