Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, Rf. The characteristics of two of the stocks are as follows:StockExpected retStandard devA8%40%B13%60%Correlation = -1 Could the equilibrium risk-free rate be greater than 10%?(HINT: Can a particular stock portfolio be substituted for the risk-free rate?)

Given: Stock Expected return Standard deviation A 8% 40% B 13% 60%…

Answered: Suppose that many stocks are traded in…

Financial Management: Theory & Practice

16th Edition

ISBN:9781337909730

Author:Brigham

Publisher:Brigham

Chapter6: Risk And Return

Section: Chapter Questions

Problem 14P: You have observed the following returns over time: Assume that the risk-free rate is 6% and the...

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Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, Rf. The characteristics of two of the stocks are as follows:

Stock	Expected ret	Standard dev
A	8%	40%
B	13%	60%
Correlation = -1

Could the equilibrium risk-free rate be greater than 10%?

(HINT: Can a particular stock portfolio be substituted for the risk-free rate?)

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