How do I form a portfolio with excess return scaled down?
Say we have a market of only 1 stock along and a bank from which we can borrow.
Say the stock has an expected return of 10 % and the bank charges 5 % interest on deposits and loans.
Now I know that the excess return is 5 % on the stock, on average.
But what if I wanted a portfolio that had excess return k5%, where k is some constant that I can multiply with. For example, k = 3, and so I want excess return equal to 15 %.
How do I calculate what I should invest and how much I should borrow, in order to get those 15 % excess rate? (I only have the stock and the bank to work with, no other assets exist)
You can’t raise your excess return if you only have one stock and one bank rate. No matter how much you borrow and invest your excess return will always be 5%.