am. 01 Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-freerate, r. The characteristics of two of the stocks are as follows:StockABCorrelation = -1Rate of returnExpected Return7%10 %a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stockportfolio be substituted for the risk-free asset?) (Round your answer to 2 decimal places.)O YesO NoStandard Deviation.45 %55 %%b. Could the equilibrium rf be greater than 8.35%?

On Risk free portfolio:WA= Weight of Stock A.WA = SDB / SDA + SDB..= 55 / 45 + 55.= 0.55Thus, WB= 1-…

Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, f The characteristics of two of the stocks are as follows: Stock A B Correlation = -1 Expected Return 7% 10 % O Yes O No 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 return b. Could the equilibrium rf be greater than 8.35%? Standard Deviation 45 % 55 % %

Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, f The characteristics of two of the stocks are as follows: Stock A B Correlation = -1 Expected Return 7% 10 % O Yes O No 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 return b. Could the equilibrium rf be greater than 8.35%? Standard Deviation 45 % 55 % %

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

Section: Chapter Questions

Problem 1PS

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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, rƒ. The characteristics of two of the stocks are as follows: Correlation = -1 Stock A B Rate of return 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.) Yes No X Answer is not complete. Expected Return 9% 13% % Standard Deviation 45% 55% b. Could the equilibrium rƒ be greater than rate of return?
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