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.)