Suppose that Intel currently is selling at $20 per share. You buy 1000 shares by using
$15,000 of your own money (investment equity) and borrowing the remainder of the
purchase price from your broker. The rate on the margin loan is 8%. You are
considering two possibilities:
Possibility 1: In one year, the price of Intel is 25.
Possibility 2: In one year, the price of Intel is 15.
a. For each case described above, what is the value of total assets, liabilities, and total
investment equity in your portfolio in one year? What is the net return on equity?
b. For each case described above, find the net return on equity using portfolio weights.
Show work. Your answers to part (a) and (b) should be the same. Show your work.
. Suppose you expect Intel to return 10% with a standard deviation of 0.18. What is
the expected return and standard deviation of your portfolio?
