Assume That the Risk-Free Rate of Return Is 3 Percent

question 40

Multiple Choice

Assume that the risk-free rate of return is 3 percent and the market portfolio on the Capital Market Line (CML) has an expected return of 11 percent and a standard deviation of 14 percent. How should you invest $100,000 if you are only willing to accept a total portfolio risk of 8 percent?

• A) invest $140,000 in the market portfolio and by borrowing $40,000 at the risk-free rate
• B) invest $80,000 in the market portfolio and the remainder in the risk-free security
• C) invest $63,636.36 in the market portfolio and the remainder in the risk-free security
• D) invest $36,363.64 in the market portfolio and the remainder in the risk-free security
• E) invest $100,000 on another portfolio on the CML that does not contain any of the market portfolio or the risk-free security but has a standard deviation of 8 percent.