There are two risky assets, and their volatilities are 8% (Asset 1) and 24% (Asset 2). Their return correlation is -1. The expected return on Asset 1 is 3.970%. The risk-free rate of the economy is (generously) 5.5%. Assuming arbitrage opportunities do not exist, what is the expected return on Asset 2 in percentage points (rounded to 1 decimal place)?
There are two risky assets, and their volatilities are 8% (Asset 1) and 24% (Asset 2). Their return correlation is -1. The expected return on Asset 1 is 3.970%. The risk-free rate of the economy is (generously) 5.5%. Assuming arbitrage opportunities do not exist, what is the expected return on Asset 2 in percentage points (rounded to 1 decimal place)?
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
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![There are two risky assets, and their volatilities are 8% (Asset 1)
and 24% (Asset 2). Their return correlation is -1. The expected
return on Asset 1 is 3.970%. The risk-free rate of the economy is
(generously) 5.5%. Assuming arbitrage opportunities do not exist,
what is the expected return on Asset 2 in percentage points
(rounded to 1 decimal place)?](/v2/_next/image?url=https%3A%2F%2Fcontent.bartleby.com%2Fqna-images%2Fquestion%2Fab02b187-b76e-4cf4-b0aa-269039faaebb%2F5699be64-ac12-4176-81b6-bc44245197c4%2Ftmh9t9e_processed.jpeg&w=3840&q=75)
Transcribed Image Text:There are two risky assets, and their volatilities are 8% (Asset 1)
and 24% (Asset 2). Their return correlation is -1. The expected
return on Asset 1 is 3.970%. The risk-free rate of the economy is
(generously) 5.5%. Assuming arbitrage opportunities do not exist,
what is the expected return on Asset 2 in percentage points
(rounded to 1 decimal place)?
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