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ABC allows employees to purchase two stocks (Stock A and Stock B) to sustain their retirement portfolio. Suppose that there are many stocks in the
ABC allows employees to purchase two stocks (Stock A and Stock B) to sustain their retirement portfolio. Suppose that there are many stocks in the 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%
Note: Correlation = -1
Suppose it is possible to borrow at the risk-free rate, Rf. What must be the value of the risk-free rate?(Hint: think about constructing a risk-free portfolio from Stocks A and B).
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