Q: ave. portfolio expected asset return 7.4%, average portfolio leverage is 40%. pay 4.25% in the repo market for borrowing. the expected return of average portfolio is a. 8.66% b.10.55% c.11.81% Answer A 7.4+40/100*(7.4-4.25)=8.66 Based on the fomula in notes and CFAI text, should be 7.4+40/60*(7.4-4.25)=9.5 it is not one of choice. anything missed?
I like thinking of it this way: With 40% levereged, 140% of Equity is earning 7.4%, so 7.4%*1.4=10.36%. We then subtract out the payment for the leverage which is 4.25%*0.4=1.7%, so 10.36%-1.7%=8.66%. This seems to be a nice intuitive way to figure it out with out memorizing formulas. Your calculation above coming to 9.5% is taking a leverage percent of 40/60, or 66.67% rather than 40%. The calculation in the answer is correct, as it uses the 40% leverage ratio.
mxz583 Wrote: tks a lot!