Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows:

Stock Expected Return Standard Deviation A 10% 5%

B 15 10 Correlation = −1 Suppose that it is possible to borrow at the risk-free rate, rf

. What must be the value of the riskfree rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.) P-968