1. Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows:

   • Stock A: Expected return = 4% and standard deviation = 40%
   • Stock B: Expected return = 6% and standard deviation = 60%

   If correlation between stock A and stock B is -1 (perfectly negatively correlated), then which of the following represents a value closest to equilibrium risk-free rate?

   		4.00%
   		4.60%
   		4.80%
   		4.40%