Consider a risky asset X with an expected rate of return of 12% and a standard deviation of 7%. The Treasury Bill rate of return is 3%. You hold a portfolio of total market value $4,000, entirely invested in the risky asset.

1. Consider leveraging your portfolio. You borrow an additional $2000 to invest in the risky asset. Suppose that the borrowing rate is equal to the Treasury Bill rate. Calculate the Sharpe ratio of your leveraged portfolio and compare it to the Sharpe ratio of your initial portfolio. (10 marks)

2. Suppose that the borrowing rate now is higher than the Treasury Bill rate and equal to 6%. Calculate the Sharpe ratio of the leveraged portfolio as constructed in part a. Comment on the result. (10 marks)