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Assuming there is ONE risk factor, the interest rate (IR) risk factor. Investors can borrow at the risk-free rate rf of 3%. Portfolio (A) is
Assuming there is ONE risk factor, the interest rate (IR) risk factor. Investors can borrow at the risk-free rate rf of 3%. Portfolio (A) is well-diversified with the risk-return profile below. If an investor wants to profit $10,000 from a net-zero portfolio, constructed with Portfolio A, IR portfolio, and the risk-free rate. How much does he need to borrow/lend at the risk-free rate?
| E(R)-rf | |
Portfolio (A) | 1.2 | 8% |
Interest Rate Risk Factor Portfolio | 1.0 | 6% |
Borrow $55,556 | ||
Lend $55,556 | ||
Borrow $250,000 | ||
Lend $250,000 | ||
None of the above |
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