Page 23 - FINAL CFA SLIDES DECEMBER 2018 DAY 12

Session Unit 12:
42. Portfolio Risk and Return: Part II

Example: Portfolio risk and return with borrowing and lending, p.152:
Assume R , = 5%;
f Calculate the expected return and standard deviation of returns for portfolios that are
E(R ), = 11%; and 25%, 75%, and 125% invested in R . Where:
M
σ = 20%. M Wrf = 1 - Wm
M

tanties

With a weight of 125% in the Rm, investor borrows 25 % of his portfolio assets at 5%. An investor with $10,000 would then borrow
$2,500 and invest a total of $12,500 in the market portfolio. This leveraged portfolio will have an ER of 12.5% and SD of 25%.