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Suppose that many stocks are traded in the market and that it is possible to borrow...

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Finance

Suppose that many stocks are traded in the market and that it ispossible to borrow at the risk-free rate,rÆ’. The characteristics of two of thestocks are as follows:

StockExpected ReturnStandard Deviation
A8%40%
B11%60%
  Correlation = –1
a.

Calculate the expected rate of return on this risk-freeportfolio? (Hint: Can a particular stock portfolio besubstituted for the risk-free asset?) (Round your answer to2 decimal places.)

  Rate of return%
b.

Could the equilibrium rÆ’ be greaterthan 9.20%?

Yes
No

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