The original question that was asked:

Given the following: You currently own $100,000 worth of Wal-Mart stock. Suppose that Wal-Mart has an expected return of 14% and a volatility of 23%. The market portfolio has an expected return of 12% and a volatility of 16%. The risk-free rate is 5%. Assuming the CAPM assumptions hold, what alternative investment has the highest possible expected return while having the same volatility as Wal-Mart? What is the expected return of this portfolio?

The tutor response was:

Answer

Explanation:

Solution

Since SD(RxCML) =xSD(RMkt)

So this means that 23 = x(.16)

Therefore we solve for x = .23/.16

x = 1.4375, as long the 144% market and short 44% risk-free.

So E[RxCML] =rf+x(E[RMkt] -rf)

Therefore E[RxCML] = .05 +1.4375(.12 - .05)

=.1506 x 100%

= 15.06%

NEW QUESTION:

To determine percentages:

you use x and 1-x, where x = 1.4375 and 1-x = 1 - (1.4375) = - 43.75

The answer provided is 144% long and 44% short (risk free).

How is that interpreted in relation to the $100,000 investment. How should that be divided between long and short??