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

question 71

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 16 percent and a standard deviation of returns of 20 percent. The risk-free asset has an interest rate of 4 percent. Calculate the expected return on the resulting portfolio.

• A)20 percent
• B)32 percent
• C)28 percent
• D)12 percent

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Definitions:

High-low Method

A technique in cost accounting used to determine the variable and fixed components of a company's costs by analyzing the highest and lowest levels of activity.

Machine Hour

A measure of the amount of time a machine is operated, used in cost accounting to allocate costs to products based on machine usage times.

Contribution Margin

The difference between sales revenue and variable costs, indicating how much revenue contributes towards covering fixed costs and generating profit.

Sales Revenue

The total amount of money generated by a company from its sales of goods or services before any expenses are subtracted.