Assuming there is ONE risk factor, the interest rate (IR) risk factor. Investors can borrow at...

Assuming there is ONE risk factor, the interest rate (IR) risk factor. Investors can borrow at the risk-free rate rf of 3%. Portfolio (A) is well-diversified with the risk-return profile below. If an investor wants to profit $10,000 from a net-zero portfolio, constructed with Portfolio A, IR portfolio, and the risk-free rate. How much does he need to borrow/lend at the risk-free rate?

Portfolio A has a beta of 1.2 and E(R)-rf = 8%

Interest Rate Risk Factor Portfolio has a beta of 1 and E(R)-rf = 6%

a) Borrow $55,556

b) Lend $55,556

c) Borrow $250,000

d) Lend $250,000

e) None of the above

Expert Solution

jeff jeffy answered 4 months ago

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