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Suppose that there are two stocks in the security market. The characteristics of stocks A and B are given as follows: Stock Expected Return Standard
Suppose that there are two stocks in the security market. The characteristics of stocks A and B are given as follows:
Stock | Expected Return | Standard Deviation |
A | 13% | 5% |
B | 15% | 15% |
The correlation between these two stocks is -1.
Suppose that it is possible to borrow at the risk-free rate, rf. What must be the value of the risk-free rate? (Hint: Think about constructing a risk-free portfolio from stocks A and B.)
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