Problem 6-14

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		11	%		35	%
B		20	%		65	%
Correlation = 1

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

Rate of return

%

b.

Could the equilibrium r be greater than 14.15%?

	Yes
	No

References

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