Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, ry. The characteristics of two of the stocks are as follows: Correlation-1 Stock Rate of return Expected Return 7% 14% Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) O Yes O No Standard Deviation 30% 70% b. Could the equilibrium rybe greater than rate of return?

Essentials Of Investments
11th Edition
ISBN:9781260013924
Author:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Publisher:Bodie, Zvi, Kane, Alex, MARCUS, Alan J.
Chapter1: Investments: Background And Issues
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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, r4. The characteristics of
two of the stocks are as follows:
Correlation=
Rate of return
Stock
Expected
Return
7%
14%
Required:
a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a
"synthetic" risk-free asset?) (Round your answer to 2 decimal places.)
O Yes
O No
Standard
Deviation
30%
70%
b. Could the equilibrium rybe greater than rate of return?
Transcribed Image Text:Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, r4. The characteristics of two of the stocks are as follows: Correlation= Rate of return Stock Expected Return 7% 14% Required: a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (Round your answer to 2 decimal places.) O Yes O No Standard Deviation 30% 70% b. Could the equilibrium rybe greater than rate of return?
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