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Suppose you construct a portfolio, say portfolio X, by investing in the market portfolio and at the same time lending/borrowing at the risk-free rate (i.e.,
Suppose you construct a portfolio, say portfolio X, by investing in the market portfolio and at the same time lending/borrowing at the risk-free rate (i.e., long/short risk-free assets). You want the standard deviation of portfolio X to be 20%. If you have $1,000 of your own money, how much do you need to borrow/lend at the risk-free rate in order to achieve your investment goal, i.e., make the standard deviation of portfolio X equal to 20%?
A. You lend $500
B. You lend $666.7
C. You borrow $666.7
D. You borrow $500
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