Question

1. Over the past month, TSLA made 14% and GOOG made −12%. The risk free rate was 1% (EMR). How much would you have today if you had invested the following amounts one month ago? Start by working out the portfolio return.

(a) $2000 in GOOG, $2000 in TSLA

(b) Invest $2000 of your own money in this way: short $2000 in TSLA, $1000 invested in a bank account, the rest in GOOG.

(c) Borrow $5000, and buy $10000 worth of TSLA

(d) Borrow $5000, and buy $10000 worth of GOOG

(e) What are your thoughts about “using leverage”, i.e., borrowing to make an investment, based on the last two scenarios?

Answer 1

Hello!

First, we have to keep in mind that the 1% Risk free rate is yearly, so to get the Monthly we divide it by 12 = 0.08% aprox

a)
Stock	Return	Amount Invested	Final Amount
TSLA	14%	$2,000	$2,280
GOOG	-12%	$2,000	$1,760
PortFolio	2%	$4,000	$4,040
b)
Stock	Return	Amount Invested	Final Amount
TSLA	-14%	$2,000	$1,720
GOOG	-12%	$1,000	$880
Bank	0.08%	$1,000	$1,001
PortFolio	-9.98%	$4,000	$3,601
c)
Stock	Return	Amount Invested	Final Amount
TSLA	14%	$10,000	$11,400
d)
Stock	Return	Amount Invested	Final Amount
GOOG	-12%	$10,000	$8,800
For option c) and d) do not forget the interest expenses and that we have to pay back the money that we borrowed (:
e)
Borrowing money to invest make it much riskier, because we need to get a higher return to be able to pay the interest expenses, and if we performance a negative return, we have to pay back the money we borrowed plus interest.