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 Return Standard Deviation A 8% 40%
B 13 60 Correlation 1 Could the equilibrium rf be greater than 10%? (Hint: Can a particular stock portfolio be substituted for the risk-free asset?) LO.1