Question
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 | 7 | % | 45 | % | ||
| B | 10 | % | 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.)
b. Could the equilibrium r be greater than 8.35%?
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Yes
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No
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College Mathematics for Business Economics Life Sciences and Social Sciences
Authors: Raymond A. Barnett, Michael R. Ziegler, Karl E. Byleen
12th edition
321614003, 978-0321614001
