CFA Practice Question

There are 294 practice questions for this study session.

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 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