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Suppose that a Treasury bill offers an annual return of about 1% and the expected stock market risk premium is 8.5%. The standard deviation of

Suppose that a Treasury bill offers an annual return of about 1% and the expected stock market risk

premium is 8.5%. The standard deviation of the Treasury-bill return is zero and the standard deviation

of stock market return is 20%. Use the formula for portfolio risk to calculate the standard deviation of

portfolios with different proportions in Treasury bills and the market. Graph the expected returns and

standard deviations of this portfolio.

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