Question
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, ry.
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, ry. The characteristics of two of the stocks are as follows: Stock Correlation = -1 Required: A B Expected Return 78 108 Standard Deviation 45% 55% 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.) Rate of return b. Could the equilibrium ry be greater than rate of return? O Yes O No
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