Leverage and Portfolio Risk
Footnote 5 in the chapter asks you to consider a borrow-and-invest strategy in which you use $1 million of your own money and borrow another $1 million to invest $2 million in a market index fund. If the risk-free interest rate is 4% and the expected rate of return on the market index fund is 12%, what are the risk premium and expected rate of return on the borrow-and-invest strategy? Why is the risk of this strategy twice that of simply investing your $1 million in the market index fund?
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