Consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.57 percent and the expected rate of return on the market index fund is 12.35 percent, what is the expected return on this borrow-and-invest strategy?

Consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.57 percent and the expected rate of return on the market index fund is 12.35 percent, what is the expected return on this borrow-and-invest strategy?

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 10P

See similar textbooks

Similar questions

Consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million (at the t-bill rate) to invest $2 million in a market index fund. If the risk free interest rate is 5.52 percent and the expected rate of return on the market index fund is 12.68 percent, what is the risk premium on this borrow-and-invest strategy?
Assume the price of the Schwab Small-Cap index fund is $50 per share, the annual expected return is 18%, and the annual standard deviation is 0.24. Assume you have $10,000 of investment equity and you want to buy the Schwab Small-Cap fund on margin such that your total portfolio standard deviation is 0.30. Assume you can borrow at 8% annually. What is the portfolio weight in the Small-Cap index fund such that the standard deviation of your portfolio is 0.30? Group of answer choices: A) 1.25 B) .75 C) -.25 D) 1
You can considering investing in fund with a beta of .75 and a 7% projected annual return. Assuming that the current market returns on the T-bills, T-bonds and S&P 500 are .45%, 1.3% and 5% respectively, is this fund’s projected return worth its risk (ie. Is this a good investment)?
Assume that Coppa recommends to Stephenson to invest the additional $2 million inFund D, which is a Commodity Fund. Calculate the expected return and standarddeviation of the new overall portfolio if Stephenson follows her advice.
A company's fund manager has a P20,000,000 portfolio with a beta of 0.75. The risk-free rate is 4.50% and the market risk premium is 5.00%.The manager expects to receive an additional P30,000,000, which she plans to invest in several stocks. After investing the additional funds, she wants the fund's required return to be 9.50%. 1. What is the required rate of return on the initial P20M investment? 2. What is the rate of return of all risky and risk-free securities? 3. To achieve the fund manager’s required return target, the funds should be invested in an investment with a beta of 4. Judge the overall riskiness of the P50M portfolio A. Aggressive B. Neutral C. Conservative
You are evaluating two investment alternatives. One is a passive market portfolio with an expected return of 10% and a standard deviation of 16%. The other is a fund that is actively managed by your broker. This fund has an expected return of 15% and a standard deviation of 20%. The risk-free rate is currently 7%. What is the maximum fee (expense ratio) your broker could charge and still leave you as well off as if you had invested in the passive market fund? (Assume that the fee would be a percentage of the investment in the broker's fund, and would be deducted at the end of the year.)  Group of answer choices 5.00% 4.25% 3.00% 6.33% None of the above.
You have $5000 to invest for 1 year. Fund A has an estimated 4% annual return, and Fund B has an estimated 10% annual return. Fund A is more stable, and preferred among investors with low risk tolerance. Fund B is less stable, but has larger returns. Answer the following questions about this investment opportunity. 1. Suppose you have a low risk-tolerance, and you invest everything in Fund A. How much do you expect to make on your investment?Round to the nearest cent. 2. Suppose you have a medium risk-tolerance, and you want an annual return of $355. You decide to invest part in Fund A and the rest in Fund B. How much do you need to invest in Fund A?
Assuming risk free rate to be 2% p.a while market return is expected to be 8% return with a Standard Deviation of 10%, answer the following question using Markowitz Model of lending and borrowing at risk free rate a) AIG can take a maximum portfolio risk of 5%. How much return can they expect with this risk appetite from a portfolio comprising of risky stocks and Risk free asset. Show the risk return combination for the fund with the weights
. a. A mutual fund with beta of .8 has an expected rate of return of 14%. If rf = 5%, and you expect the rate of return on the market portfolio to be 15%, should you invest in this fund? What is the fund’s alpha?b. What passive portfolio comprised of a market-index portfolio and a money market account would have the same beta as the fund? Show that the difference between the expected rate of return on this passive portfolio and that of the fund equals the alpha from part (a).
Suppose you are the money manager of an Rs.8 million investment fund. The fund consists of 4 stocks with the following investments and betas: Stock Investment Beta A Rs.800,000 1.2 B 1200,000 (0..3) C 2,000,000 1.0 D 4,000,000 0.6 If the market required rate of return is 13.5 percent and the risk-free rate is 5.5 percent, what is the fund's required rate of return? Change the weightages of the investments with your own consent to increase the rate of return and also interpret your answer in a logica
Suppose that a fund that tracks the S&P 500 has mean E [Rm] = 16% and standard deviation σM = 10%, and suppose that the T-Bill rate is Rf = 8%. Answer the following questions about efficient portfolios:(a) What is the expected return and standard deviation of a portfolio that is totally invested in the risk-free asset?(b) What is the expected return and standard deviation of a portfolio that has 50% of its wealth in the risk-free asset and 50% in the S&P 500?(c) What is the expected return and standard deviation of a portfolio that has 125% of its wealth in the S&P 500, financed by borrowing 25% of its wealth at the risk-free rate?(d) What are the weights for investing in the risk-free asset and the S&P 500 that produce a standard deviation for the entire portfolio that is twice the standard deviation of the S&P 500? What is the expected return on that portfolio?
Suppose you are the money manager of a $4 million investment fund. The fund consists of four stocks with the following investments and betas: Stock Investment Beta A $300,000 1.25 B 700,000 (0.75) C 1,500,000 1.00 D 1,500,000 0.75 If the market's return in 12% and the risk-free rate is 5%, what is the fund's required rate of return (You must calculate the fund's beta, then its required rate of return).