Suppose you are given stocks A and B. Stock A has an expected return of 11% and a standard deviation of 4%. Stock B has an expected return of 21% and a standard deviation of 10%. The correlation between them is -1. Suppose 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.) (Round answer to 3 decimal places.)
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.
Suppose you are given stocks A and B. Stock A has an expected return of 11% and a standard deviation of 4%. Stock B has an expected return of 21% and a standard deviation of 10%. The correlation between them is -1. Suppose 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.) (Round answer to 3 decimal places.)
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