Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Stock A B Correlation = -1 Required: Expected Standard Return Deviation 11% 20% 35% 65% 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.) Rate of return %
Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two of the stocks are as follows: Stock A B Correlation = -1 Required: Expected Standard Return Deviation 11% 20% 35% 65% 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.) 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
Section: Chapter Questions
Problem 1PS
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Transcribed Image Text:Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rf. The characteristics of two
of the stocks are as follows:
Expected Standard
Stock
A
B
Correlation = -1
Required:
Return Deviation
11%
20%
35%
65%
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.)
Rate of return
%
b. Could the equilibrium rf be greater than rate of return?
○ Yes
○ No
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