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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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