Question
You have $500,000 available to invest. The risk-free rate as well as your borrowing rate is 8%. The return on a risky portfolio, A, is
You have $500,000 available to invest. The risk-free rate as well as your borrowing rate is 8%. The return on a risky portfolio, A, is 16%. If you wish to earn a 22% return, what would your investments be in dollar terms in each of the two available investments? Notes: yes, it is possible to get an overall portfolio return of 22% using securities which have returns of 8% and 16%. The weights in a portfolio can be negative and greater than 1 (or 100%). Negative weights imply borrowing and positive weights imply investing i.e. short and long positions.
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