Suppose you have $10,000 in cash, and you decide to borrow another $10,000 at a 5% interest rate in order to invest $20,000 in portfolio Q, which has a 10% expected return and a 20% volatility. What is the expected return and volatility of your investment? What is your realized return if Q goes up 30% over the year? What if Q falls by 10%? Solution) x = 2 (why?) E(Rxp) = rf + (E(Rp) rf)x = 0.05 + (0.1 0.05) x 2 = 0.15 SD (Rxp) = xSD(Rp) = 2 x 0.2 = 0.4 Rxp = rf + (Rp rf)x Ryp = 0.05 + (0.3 -0.05) x 2 = 0.55 if realized return is 30% Rxp = 0.05 + (-0.1 0.05) x 2 = -0.25 if realized return is -10%. Suppose you have $10,000 in cash, and you decide to borrow another $10,000 at a 5% interest rate in order to invest $20,000 in portfolio Q, which has a 10% expected return and a 20% volatility. What is the expected return and volatility of your investment? What is your realized return if Q goes up 30% over the year? What if Q falls by 10%? Solution) x = 2 (why?) E(Rxp) = rf + (E(Rp) rf)x = 0.05 + (0.1 0.05) x 2 = 0.15 SD (Rxp) = xSD(Rp) = 2 x 0.2 = 0.4 Rxp = rf + (Rp rf)x Ryp = 0.05 + (0.3 -0.05) x 2 = 0.55 if realized return is 30% Rxp = 0.05 + (-0.1 0.05) x 2 = -0.25 if realized return is -10%