Answer: borrow 25% of her wealth at the risk-free rate and invest 125% in the optimal risky portfolio.

## Explanation A risk-seeking investor would want to take on more risk than the optimal risky portfolio to achieve higher expected returns. This is done by borrowing at the risk-free rate and investing more than 100% of wealth in the risky portfolio, which is called leveraging. **Key concepts:** - **Capital Allocation Line (CAL)**: Shows all possible combinations of the risk-free asset and the optimal risky portfolio - **Risk-seeking investor**: Wants higher returns and is willing to take more risk - **Leverage**: Borrowing at the risk-free rate to invest more than 100% in the risky portfolio **Analysis of options:** - **Option A**: Lending 100% at risk-free rate (5% return) - This is for risk-averse investors, not risk-seeking - **Option B**: Investing 100% in optimal risky portfolio (15% return, 20% risk) - This is the market portfolio point on CAL - **Option C**: Borrowing 25% at risk-free rate and investing 125% in risky portfolio - This creates leverage and moves up the CAL beyond the optimal risky portfolio **Expected return for Option C:** - Investment in risky portfolio: 125% - Borrowing: 25% at 5% - Expected return = (1.25 × 15%) - (0.25 × 5%) = 18.75% - 1.25% = 17.5% **Risk for Option C:** - Standard deviation = 1.25 × 20% = 25% Since a risk-seeking investor wants higher returns than the optimal risky portfolio offers, they would choose to leverage by borrowing at the risk-free rate and investing more than 100% in the risky portfolio, making Option C the correct choice.

Author: LeetQuiz .