1. You have $500,000 available to invest. The risk-free rate, as well as your borrowing rate, is 8%. The return on the risky portfolio is 16%. If you wish to earn a 22% return, you should ____.
a. invest $125,000 in the risk-free asset.
b. invest $375,000 in the risk-free asset
c. borrow $125,000
d. borrow $375,000
e. none of the above
2. John House has taken a 20-year, $250,000 mortgage on his house at an interest rate of 6% per year. What is the value of the mortgage after the payment of the fifth annual installment?