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Suppose that many stocks are traded in the market and that it is possible to borrow...

Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rƒ. The characteristics of two of the stocks are as follows:


Stock Expected Return Standard Deviation
A 7% 45%
B 10% 55%
  Correlation = –1

Calculate the expected rate of return on the risk-free portfolio? Try to construct a risk-free portfolio using stocks A and B. Enter as a decimal number rounded to 4 decimal places

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Answer #1

The answer is as follows:

The expected rate of return on the risk-free portfolio= 8.35%

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