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Suppose you borrow at the risk-free rate an amount equal to the half of your...

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Finance

Suppose you borrow at the risk-free rate an amount equal to the half of your initial wealth and invest both the borrowed amount and your initial wealth in the market portfolio with an expected return of 6% and a standard deviation of returns of 12%. The risk-free asset has an interest rate of 2%.

(a) Calculate the expected return and standard deviation of your portfolio. Illustrate your answer in a diagram. (5 marks)

(b) Calculate and comment on the Sharpe ratio for the market portfolio and your portfolio. Illustrate your answer in a diagram. (4 marks)

(c) Calculate the beta risk for the resulting portfolio. Illustrate your answer in a diagram. (2 marks)

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