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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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