Question
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
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%? | ||||
|
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Investment Management
Authors: Stephen Lofthouse
2nd Edition
047149237X, 9780471492375
