Question
Ms Bagwell has $1,000 to invest and is considering investing it in the common stock of Merville Enterprises. As a risky investment, as reected in
Ms Bagwell has $1,000 to invest and is considering investing it in the common stock of Merville Enterprises. As a risky investment, as reected in the historical standard deviation of its return of 0.20; the expected return on Merville stock is 14 percent. In addition Ms Bagwell is also considering the possibility of investing in short term government bonds, known as Treasury Bills. These bills, which are relatively risk free, yield a return of 10 percent. She can, if she so wishes, borrow money on her own account, at 10 percent interest rate. Having discussed with her investment advisor, she was oered four dierent portfolios:
(1) Invest all her money in Treasury Bills; (2) Invest $350 in Merville stocks and the rest in Treasury Bills; (3) Invest all her money in Merville stocks; or (4) Borrow $200 and invests everything, including money borrowed, in Melville stocks.
You are required to show the risk and return relationships of all 4 portfolios.
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