Assignment:
Suppose that there are many stocks in the market and that the characteristics of Stocks A and B are given as follows:
|
Stock
|
Expected Return
|
Standard Deviation
|
|
A
|
10%
|
5%
|
|
B
|
15%
|
10%
|
|
Correlation = 1
|
Suppose that it is possible to borrow at the risk-free rate, Rf. What must be the value of the riskfree rate?
(Hint: think about constructing a risk-free portfolio from Stocks A and B).