Problem 6-14 (Algo) Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, r. The characteristics of two of the stocks are as follows:

Stock Expected Return Standard Deviation A 5% 45% B 10% 55% Correlation = 1

Required:

a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.)

b. Could the equilibrium r be greater than rate of return?