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Please show work for thumbs up:) Assume a Schwab Small-Cap fund has an annual expected return of 16% and an annual standard deviation of 0.25.
Please show work for thumbs up:)
Assume a Schwab Small-Cap fund has an annual expected return of 16% and an annual standard deviation of 0.25. Assume you have $10,000 of your own money to invest and that you plan to invest in the Schwab Small-Cap fund using both your money as well as some of the broker's money (if necessary) such that your total expected annual return on your portfolio is 22%. Assume you can lend and borrow at 7% annually. What is the investment weight you need in the Small-Cap index fund such that the expected return on your portfolio is 22%? Pick the number closest to the correct answer. (Hint: Here are some suggestions when thinking about this problem: Start by writing a formula for the expected return in the portfolio. The formula will include 2 assets -- the Schwab fund and a risk-free asset. The risk-free rate will be the 7%. The expected return to the portfolio will be 22% because that is your goal. If you put all of your money in the Small-Cap fund without any borrowing then your expected return would be the same as the Small-Cap fund. It would be 16% not 22%. . If you are thinking about the CAL for this problem the intercept would be 7% and the 100% Small-Cap portfolio would have an x-coordinate of 25 and a y- coordinate of .16.)
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