Answer: 0.155

## Explanation When the portfolio manager increases the weight of the risky asset to 130%, this means they are borrowing at the risk-free rate to invest more in the risky asset. The weight of the risk-free asset becomes negative. **Calculation:** - Weight of Asset A (risky) = 130% = 1.3 - Weight of Asset B (risk-free) = 1 - 1.3 = -0.3 **Expected return formula:** \[\text{Expected Return} = (w_A \times r_A) + (w_B \times r_B)\] \[\text{Expected Return} = (1.3 \times 14\%) + (-0.3 \times 9\%)\] \[\text{Expected Return} = 18.2\% - 2.7\% = 15.5\%\] **Concept Explanation:** - This scenario represents leveraging the portfolio by borrowing at the risk-free rate - The capital market line allows investors to move beyond the simple combination of risk-free and risky assets by borrowing - A weight of 130% in the risky asset means the investor is borrowing 30% of their capital at the risk-free rate to invest more in the risky asset - The negative weight on the risk-free asset represents the borrowing position

Author: Tanishq Prabhu