Suppose that it is possible to borrow at the risk-free rate, Financial Management

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Suppose that it is possible to borrow at the risk-free rate

Suppose that there are many stocks in the security market and that the characteristics of stocks A and B are given as follows:

Stock Expected Return Standard Deviation

A 14 % 4 %

B 19 12

Correlation = –1

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.)

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Financial Management: Suppose that it is possible to borrow at the risk-free rate

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Financial Management: Suppose that it is possible to borrow at the risk-free rate

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