Suppose that many stocks are traded in the market and that it ispossible to borrow at the risk-free rate, .The characteristics of two of the stocks are as follows:

Stock

Expected Return

Standard Deviation

A

11

%

35

%

B

20

%

65

%

Correlation = –1

a. Calculate the expected rate of return on thisrisk-free portfolio? (Hint: Can a particular stockportfolio be substituted for the risk-free asset?) (Roundyour answer to 2 decimal places.)

b. Could the equilibrium begreater than 14.15%?

*

Yes

*

No




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*


(2) for Risk free footfolio WA = 6B SA+GB i LOA = 65 A 65+35 & <65 = 10A OB = 1.65 op - 35 - ER) = -65 (+ .3g(20) TER) = 14.15) (6) 14.15 ER) – 14.15 Rf must also be us 14.151.
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