b)

The share of the portfolio that is your own funds, and therefore YOUR investment (stated as a percent the funds you yourself put in) is larger than 100% when you borrow part of the funds. For example, suppose you put 50 cents of your own money with 50 cents of borrowed money, and buy $1.00 of the market portfolio. Then stated as a percentage of your own funds, $1 is 200% of 50 cents. To generalize this to borrowed percentages other than 50%, we note would use the relationship

Share as a percent of own funds=100% divided by the decimal share of the total portfolio that is borrowed

The key here is to see that we need to state the portfolio share as a percentage of YOUR personal contribution to the total portolio

c)

The key here is to see that we need to state this portfolio share as a percentage of YOUR contribution to the total in the portfolio. So, if the borrowed funds are 50 cents of the total $1 invested in the market portfolio, which means your own funds are 50% or 50 cents of the total $1 invested, then we get

50 cents/50 cents=100%

To generalize to any percent borrowed, we use

Share of the portfolio borrowed as a percent of YOUR own funds=Share of invested funds borrowed divided by share of invested funds not borrowed

d)

E(Rp)=(share of the portfolio as a percent of YOUR own funds)*E(Rm) +(share of the portfolio borrowed as a percent of YOUR own funds)*(E(return on the liability)

e)

Leveraged Portfolio Beta=200%*1 + 100%*0=2, if we had 50 cents of every dollar invested borrowed.

f)

E(Rp)=Rf + beta*(market risk premium), where the market risk premium is calculated as E(Rm) - Rf.

h Calculating the expected return on a leveraged portfolio What return should be expected from investing in the market portfolio using 40.0% your own money, if the expected return on the market portfolio is at the risk-free rate of 60% 8.1% borrowed funds and and you are able to borrow 5.7% 60.0% Risk-free rate= Perecent of invested funds borrowed= Precent of invested funds not borrowed= Share of the portfolio as a percent of YOUR own funds Share of the portfolio borrowed as a percent of YOUR own funds=1 E(Rp)= Beta of the leveraged portfolio= E(Rp) calculated using the SML=[ h Calculating the expected return on a leveraged portfolio What return should be expected from investing in the market portfolio using 40.0% your own money, if the expected return on the market portfolio is at the risk-free rate of 60% 8.1% borrowed funds and and you are able to borrow 5.7% 60.0% Risk-free rate= Perecent of invested funds borrowed= Precent of invested funds not borrowed= Share of the portfolio as a percent of YOUR own funds Share of the portfolio borrowed as a percent of YOUR own funds=1 E(Rp)= Beta of the leveraged portfolio= E(Rp) calculated using the SML=[