Explanation

Since the investor is investing 115% of their savings in the portfolio, this means they are borrowing 15% of funds at the risk-free rate and investing the entire amount (115%) in the market portfolio.

Calculation:

• Investment in portfolio: 115%
• Borrowing (negative investment in risk-free asset): -15%
• Risk-free rate: 8%
• Portfolio expected return: 17%

Expected return formula: $E[r] = (w_{rf} \times r_{rf}) + (w_p \times r_p)$ $E[r] = (-15\% \times 8\%) + (115\% \times 17\%)$ $E[r] = (-0.15 \times 0.08) + (1.15 \times 0.17)$ $E[r] = (-0.012) + (0.1955)$ $E[r] = 0.1835 = 18.35\%$

Key Points:

• The investor is using leverage by borrowing at the risk-free rate
• The beta (1.2) and standard deviation (5.5%) are not needed for this calculation
• The expected return increases due to the leverage effect
• This demonstrates the concept of the Capital Market Line (CML) where investors can achieve higher returns by borrowing at the risk-free rate to invest more in the market portfolio