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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, rg. The characteristics of two
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rg. The characteristics of two of the stocks are as follows: Stock A B Correlation - -1 Expected Return Standard Deviation 78 308 103 708 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 retum % b. Could the equilibrium r, be greater than 7.90%? O Yes
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