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: Expected Return Standard Stock Deviation 25% 75% A 6% B 10% Correlation =-1 a. Calculate the expected rate of return on the risk-free portfolio? (Hint: Try to construct a risk-free portfolio using stocks A and B.) (Enter your answer as a percentage rounded to 2 decimal places.) Expected rate of return b. Could the equilibrium rf be greater than, equal to, or less than your answer in #a? greater than equal to less than
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: Expected Return Standard Stock Deviation 25% 75% A 6% B 10% Correlation =-1 a. Calculate the expected rate of return on the risk-free portfolio? (Hint: Try to construct a risk-free portfolio using stocks A and B.) (Enter your answer as a percentage rounded to 2 decimal places.) Expected rate of return b. Could the equilibrium rf be greater than, equal to, or less than your answer in #a? greater than equal to less than
Chapter8: Analysis Of Risk And Return
Section: Chapter Questions
Problem 25P
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