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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

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 9 % 45 %
B 13 % 55 %
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 :

Could the equilibrium r be greater than 10.80%?

multiple choice

  • Yes

  • No

A pension fund manager is considering three mutual funds. The first is a stock fund, the second is a long-term government and corporate bond fund, and the third is a T-bill money market fund that yields a sure rate of 5.3%. The probability distributions of the risky funds are:

Expected Return Standard Deviation
Stock fund (S) 14% 43%
Bond fund (B) 7% 37%

The correlation between the fund returns is 0.0459.

What is the Sharpe ratio of the best feasible CAL? (Do not round intermediate calculations. Round your answer to 4 decimal places.)

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