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

8

%

40

%

B

12

%

60

%

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 9.60%?

	Yes
	No