Portfolio risk and return: suppose that the S&P500, with a beta of 1 has an expected return of 10%, and T-bills provide a risk free return of 4%.
i) How would you construct a portfolio from these two assets with an expected return of 8%
ii) How would you construct a portfolio from these 2 assets with a beta of 0.4?
iii) Now consider a borrow and invest strategy in which you use 1 million of your own money and borrow anothing 1 million to invest 2 million in total in a market index fund. If the risk free rate is 4% (you can borrow at this rate) and the expected return on the market index fund is 12% what is the risk premium and expected return on the borrow and invest strategy?