Respuesta :
His expected return from the market portfolio which has 18% expected return and the risk-free rate at 6% is 30%.
What is risk-free rate?
It is a theoretical rate of return on an investment with zero risk. As such, it is the benchmark to measure other investments that include an element of risk. Government bond yields are the example of risk-free rates for assets. In actual terms, the risk-free interest rate is assumed to be equal to the interest rate paid on a three-month government Treasury bill, which is considered as the safest investments that is possible to make.
How to calculate his expected return?
Amount invested in market portfolio from own fund = $100
Borrows $100 at risk free rate and invest that amount also in market portfolio = $200 invested in market portfolio
Weight of market portfolio = 200 / 100 = 2
Weight of risk free asset = -100 / 100 = -1
Expected return
= W market * ε (R market) + W risk free * ε (R risk free rate)
= 2 * 18 + (-1) * 6
= 30%
Therefore, his expected return should be 30%.
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