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Question - Assume that there are two alternatives to invest your 100,000 TL. In the first alternative, you borrow an additional 15,000 TL from the brokerage house with an annual interest of 5% and thus invest a total of 115,000 TL in an mutual fund. In the second alternative, you invest only your own capital of 100,000 TL in the same mutual fund without any borrowing. You predict that this mutual fund will yield either 12% or 4% with equal probability.
Required -
a. What will be your net return on each possible outcome when you choose the first alternative?
b. Calculate the expected returns of the alternatives. Which alternative is riskier and why?
c. What is the effect of debt leverage on expected return and risk? Please explain.
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