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27 July, 09:30

You have $500,000 available to invest. The risk-free rate as well as your borrowing rate is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should?

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  1. 27 July, 09:57
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    d. borrow $375,000

    Explanation:

    Given that

    Amount available to invest = $500,000

    Risk free rate = 8%

    Return on the risky portfolio = 16%

    Now the computation is shown below:

    The interest rate should be

    Interest amount on borrowings = $375,000 * 8% = $30,000

    So, the total amount available to invest is

    = $500,000 + $375,000

    = $875,000

    Now the total inflow is

    = $140,000 - $30,000

    = $110,000

    The $140,000 is come from

    = $875,000 * 16%

    So the 22% is come from

    = $110,000 : $500,000
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