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Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: STOCK EXPECTED
Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows:
| STOCK | EXPECTED RETURN | STANDARD DEVIATION |
| A | 10% | 5% |
| B | 15% | 10% |
The correlation between the stock returns is -1. Suppose that it is possible to borrow at the risk-free rate, r . What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free f portfolio from stocks A and B. )
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