You Invest $100 in a Risky Asset with an Expected

question 27

Multiple Choice

You invest $100 in a risky asset with an expected rate of return of 0.11 and a standard deviation of 0.20 and a T-bill with a rate of return of 0.03.
-What percentages of your money must be invested in the risky asset and the risk-free asset,respectively,to form a portfolio with an expected return of 0.08?

• A)85% and 15%
• B)75% and 25%
• C)62.5% and 37.5%
• D)57% and 43%
• E)cannot be determined

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Definitions:

MM Model

MM Model refers to the Modigliani-Miller theorem, which propositions about the irrelevance of capital structure in determining the overall value of a firm under certain market conditions and assumptions.

Optimal Capital Structure

Optimal capital structure is the ideal mix of debt and equity financing that minimizes a company's cost of capital and maximizes its stock price.

Cost Of Capital

Represents the rate of return that a company must earn on its investment projects to maintain its market value and attract funds.

Financial Leverage

The use of borrowed money (debt) to amplify the potential returns from an investment or project.