Question
Suppose that among the many stocks in the market there are two securities, A and B, with the following characteristics: A has E(Ra) = .08
Suppose that among the many stocks in the market there are two securities, A and B, with the following characteristics: A has E(Ra) = .08 and σ =.4 and B has E(Rb) = .18 and σ =.6. Suppose the correlation between these two is ρ = −1 and that it is possible to borrow and lend at the risk-free rate, rf.
What must be the equilibrium risk-free rate?
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SOLUTION The equilibrium riskfree rate is determined by the Capital Asset Pricing Model CAPM Accordi...
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Fundamentals of Investments
Authors: Gordon J. Alexander, William F. Sharpe, Jeffery V. Bailey
3rd edition
132926172, 978-0132926171
