Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 10% Standard Deviation 5% 9 18 Correlation = -1 Risk-free rate 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.) Note: Do not round intermediate calculations. Round your answer to 3 decimal places. %

Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows: Stock A B Expected Return 10% Standard Deviation 5% 9 18 Correlation = -1 Risk-free rate 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.) Note: Do not round intermediate calculations. Round your answer to 3 decimal places. %

Intermediate Financial Management (MindTap Course List)

13th Edition

ISBN:9781337395083

Author:Eugene F. Brigham, Phillip R. Daves

Publisher:Eugene F. Brigham, Phillip R. Daves

Chapter2: Risk And Return: Part I

Section: Chapter Questions

Problem 14P: You have observed the following returns over time: Assume that the risk-free rate is 6% and the...

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Concept explainers

Risk and return

Before understanding the concept of Risk and Return in Financial Management, understanding the two-concept Risk and return individually is necessary.

Capital Asset Pricing Model

Capital asset pricing model, also known as CAPM, shows the relationship between the expected return of the investment and the market at risk. This concept is basically used particularly in the case of stocks or shares. It is also used across finance for pricing assets that have higher risk identity and for evaluating the expected returns for the assets given the risk of those assets and also the cost of capital.

Question

Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as
follows:
Stock
A
B
Expected
Return
10%
Standard
Deviation
5%
9
18
Correlation = -1
Risk-free rate
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.)
Note: Do not round intermediate calculations. Round your answer to 3 decimal places.
%

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