Answers
Alternate Portfolio can be created by Borrowing at risk free rate and investing such borrowed amount alongwith our own money into market portfolio. This will result in increased leverage and hence, increased return and volatility.
Expected Return = Same as Facebook = 18%
Let weight of investment be W. So weight of borrowings = 1-W
Portfolio Return = (Return on investment×Weight of Investment) + (Rate of borrowing×Weight of borrowing)
18 = (11 × W) + [2 × (1 - W)]
18 = 11W + 2 - 2W
16 = 9W
Therefore, W = Weight of Investment = 1.777 and Weight of Borrowing = 1-1.777 = -0.777
Therefore, with this Portfolio Return will be (11×1.777)+(2×-0.777) = 18%
Portfolio Volatility = (Volatility of Investment×Weight of Investment) + (Volatility of Borrowing×Weight of Borrowing)
= (13×1.777) + (0×-0.777) = 23.101%
Therefore, Correct Option is (B) 23.1%
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