Question
Problem 4: Risk-free rate (3 points) Assume that all investors have some maximum standard deviation they are able to tolerate and are maximizing the expected
Problem 4: Risk-free rate (3 points) Assume that all investors have some maximum standard deviation they are able to tolerate and are maximizing the expected return subject to not exceeding that standard deviation. There are investors with all kinds of maximum standard deviations. There are only 2 assets in the market. Asset 1 has an expected return of 10% and a standard deviation of 5%. Asset 2 has an expected return of 15% and a standard deviation of 10%. The correlation between assets 1 and 2 is -1. You do not know whether CAPM holds and what are the market valuations of these two assets. What is the risk-free rate? Problem 5:
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