- CFA Exams
- CFA Level I Exam
- Study Session 18. Portfolio Management (1)
- Reading 52. Portfolio Risk and Return: Part I
- Subject 4. Risk Aversion and Portfolio Selection

###
**CFA Practice Question**

You invest $100 in a risky asset with an expected rate of return of 12% and a standard deviation of 15% and a T-bill with a rate of return of 5%. A portfolio that has an expected outcome of $115 is formed by ______

A. investing $80 in the risky asset and $20 in the risk-free asset.

B. borrowing $43 at the risk-free rate and investing the total amount ($143) in the risky asset.

C. investing $43 in the risky asset and $57 in the risk-free asset.

**Explanation:**143% x 12% - 43% x 5% = 15%

###
**User Contributed Comments**
4

User |
Comment |
---|---|

nirmaldp6 |
Can someone please explain this question ? |

deleseleuc |
It's assuming the cost of borrowing is the risk free rate. Invest $143 @ 12% = $17.16 Re-pay the $43 you borrowed at %5 = ($2.15) $100 original principal + $17.16 return - $2.15 cost of borrowing = $115.01 |

hon132 |
To earn a return over the expected return (12% vs 115 or 15% expected), you would have to borrow, paying interest on the loan. Don't even have to calculate on this one. |

swkimpo |
Assume w1 = weight of risky asset E[R] = w1*E[Rrisk] + w2*E[Rriskfree] 0.15 = (w1)*(0.12) + (1-w1)*(0.05) 0.10 = 0.07*w1 w1 = 1.43 w2 = 1-w1 = -0.43 Therefore, you invest $143 in risky asset by borrowing $43 at the risk-free rate |