Question
You plan to invest 200 MSEK of your equity in the Ericsson stock. Since your trustworthy friend has told you that the stock is undervalued,
You plan to invest 200 MSEK of your equity in the Ericsson stock. Since your trustworthy friend has told you that the stock is undervalued, you plan to leverage the investment by borrowing 100 MSEK and invest in Ericsson as well. The interest rate on the debt is 5%. The standard deviation of the return on the Ericsson stock is 35% and the expected return is 14%. All numbers are on an annual basis. What is the standard deviation and expected return on your leveraged investment in Ericsson? Assume that it is certain that you will pay back what you borrowed including interest on the debt.
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