Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, ry. The characteristics of two of the stocks are as follows: Stock A B Correlation-1 Yes No Expected Return 7% 10% 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.) Rate of return % Standard Deviation 30% 70% b. Could the equilibrium ry be greater than 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
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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, r. The characteristics of two
of the stocks are as follows:
Stock
A
B
Correlation-1
Rate of return.
Expected.
Return
79
10%
Standard
Deviation
30%
70%
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.)
b. Could the equilibrium ry be greater than rate of return?
Yes
No
Transcribed Image Text:Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, r. The characteristics of two of the stocks are as follows: Stock A B Correlation-1 Rate of return. Expected. Return 79 10% Standard Deviation 30% 70% 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.) b. Could the equilibrium ry be greater than rate of return? Yes No
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