Consider a risky investment A, which is expected to generate a +38% return if the economy enters a boom stte next year and a -14% return if the economy enters a recession. The probability of the recession state is one-and a half times as high as boom state. A risk free treasury bill has a return of 2%.
What is the expected return on a portfolio where you borrow $75,000 at the risk free rate and invest this together with $125,000 of your own money in the risky investment?