BU283 Lecture Notes - Lecture 14: Systematic Risk, Cash Flow, Risk Premium
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Buying on margin: borrow some money and buy more, equity = your money = margin, total purchase = equity + borrowed money. Where do you borrow money: your stock broker. Therefore, lends at low rate (e. g. , prime: personal line of credit, short selling t-bills! Margin buying as a portfolio of: long 1 risky and short 1 risk free asset. You have to invest, but want to buy of the mutual fund: sell a t-bill with auction proceeds of (and face value of *(1+kf)) What is the portfolio weight on the mutual fund: = (amount of purchase)/equity. What is the portfolio weight on the t-bill: purchase cash flow > 0, short sale proceeds < 0. E(kp) = wec x 12% + wf x 5% = 2 x 12 1 x 5% = 19% P = wec x 1. 25 + wf x 0 = 2 x 1. 25 = 2. 5. The formula for the treynor index is.
