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 12% 40% B 21% 60% Correlation = 1 Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a synthetic risk-free asset?) (Round your answer to 2 decimal places.) b. Could the equilibrium r be greater than rate of return? multiple choice Yes No

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: Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) Rate of return % b. Could the equilibrium rf be greater than rate of return? Yes No