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3. 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
3. 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 8% A Standard Deviation 40% 60 13 B Correlation = -1 Could the equilibrium rf be greater than 10%? (Hint: Can a particular stock portfolio be substituted for the risk-free asset?)
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