Spolier Sample Exam 1 - Question regarding calculating retur invested, borrowed, regarding, why

joemoran

Had a quick question. On the sample, I had calculated the return by taking the total invested amount $100 * 7.4% and subtracted out the cost of borrowed funds ($40 * 4.25%) and divided the sum by the total equity of $60 ( I used 100 as the total portfolio).
(7.40 - 1.70) / (60) = 9.5%
Can someone explain why this is wrong.
The answer key stated it was 8.66%

ayodayo

If you’re assigning numbers to the question that was in the sample exam, equity isn’t 60, it’s 100. The statement says that “leverage is 40%”, that means that ratio of (amount borrowed) / (Equity) = 0.40. It doesn’t mean that 40% of the total funds are borrowed.
For example: if you had $1,000 in assets and borrowed an additional $500 on margin, you would have a portfolio with 50% leverage. If you borrowed $1,000, you’d have 100% leverage.
Plug this into the leverage equation (as rekooh has done above) and you’ll get the correct answer.

amqata

7.40 + ((7.4-4.25)*.4)=8.66

PalacioHill

Can anyone help out on this? I am confused as I had no problem doing the Schweser and CFAI problems correctly.

Kapie

The question was from the CFA sample test online (the free one). Question 13. The facts for the problem were
Portfolio return 7.40%
40% of the portfolio is financed
Borrowing rate 4.25%

Daniel1985

btt means bump to top (so people can see it). What information is given to you in the problem. I think somewhere you need to use the debt to equity ratio of .66 (40/60).
Have you checked errata.