Question
(a) Suppose that there are many stocks in the security market and that the characteristics of Stocks A and B are given as follows Stock
(a) 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 risk-free rate? Explain.
(b) Calculate the expected return and standard deviation of an equally weighted portfolio of Stock A, Stock B and the risk-free asset.
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International Financial Reporting A Practical Guide
Authors: Alan Melville
6th edition
1292200743, 1292200766, 9781292200767, 978-1292200743
