An Investor Wishes to Construct a Portfolio by Borrowing 35

question 87

Multiple Choice

An investor wishes to construct a portfolio by borrowing 35% of his original wealth and investing all the money in a stock index.The return on the risk-free asset is 4.0% and the expected return on the stock index is 15%.Calculate the expected return on the portfolio.

• A) 18.25%
• B) 18.85%
• C) 9.50%
• D) 15.00%
• E) 11.15%

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Definitions:

Idle Capacity

Unused or underutilized resources within a business, often indicating inefficiency, where machinery, space, or labor is not being employed to full capacity.

Variable Overhead Cost

Costs that vary with the level of production output, such as supplies and utilities for manufacture.

Variable Costing

An accounting method that includes only variable production costs (direct materials, direct labor, and variable manufacturing overhead) in the cost of goods sold, excluding fixed overhead costs.

Absorption Costing

A cost accounting method that includes all manufacturing costs - direct materials, direct labor, and both variable and fixed overhead - as part of the cost of a finished product.