Suppose You Borrow at the Risk-Free Rate an Amount Equal

question 22

Multiple Choice

Suppose you borrow at the risk-free rate an amount equal to your initial wealth and invest in a portfolio with an expected return of 20 percent and a standard deviation of returns of 16 percent. The risk-free asset has an interest rate of 4 percent. Calculate the standard deviation of the resulting portfolio.

• A)28 percent
• B)40 percent
• C)32 percent
• D)36 percent

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Definitions:

Agreement

A mutual understanding between two or more parties about their respective rights and duties regarding past or future performances.

Offer

An offer is a proposal presented by one party to another with the intention of entering into a binding agreement, subject to acceptance by the receiving party.

Acceptance

In contract law, the expression of assent to the terms of an offer in such a manner that binds both the offeror and the offeree to the terms of the contract.

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Obligations imposed by law, requiring individuals or entities to act in a certain manner or face legal consequences for failure to do so.