CMA Final · Strategic Financial Management · Portfolio Theory and Practice
Rohit has Rs 10 lakh of his own funds. He borrows Rs 4 lakh at the risk-free rate of 7% and invests the entire Rs 14 lakh in the market portfolio, which has an expected return of 15% and a standard deviation of 18%. What is the expected return on his own funds?
The expected return on his own funds is 18.2%. The Rs 14 lakh invested earns Rs 2.10 lakh, interest on the Rs 4 lakh loan costs Rs 0.28 lakh, and the net Rs 1.82 lakh on Rs 10 lakh is 18.2%. Ignoring interest would give 21%.
- A18.2%Correct
- B21.0%
- C15.0%
- D19.0%
Explanation
Total return = 14 lakh x 15% = Rs 2.10 lakh. Interest = 4 lakh x 7% = Rs 0.28 lakh. Net = Rs 1.82 lakh on Rs 10 lakh = 18.2%. The 19.0% option wrongly divides the interest cost by 14 lakh (21% - 2%). The 21% option ignores the borrowing cost.
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