Suppose that many stocks are traded in the market and that it is

possible to borrow at the risk-free rate, rf. The characteristics of two

of the stocks are as follows:

StockExpected Return Expected Return 

A8%   40%

B1360

Correlation = -1

Could the equilibrium rf be greater than 10%? (Hint: Can a particular stock portfolio be substituted for the risk-free asset?)

4. Assume expected returns and standard deviations for all securities,

as well as the risk-free rate for lending and borrowing, are known.

Will investors arrive at the same optimal risky portfolio? Explain.

5. What is the relationship of the portfolio standard deviation to the

weighted average of the standard deviations of the component assets?

6. A project has a 0.7 chance of doubling your investment in a year

and a 0.3 chance of halving your investment in a year. What is the standard deviation of the rate of return on this investment?

Answer rating: 100% (QA)

No investors will not arrive at the same optimal risky portfolio The optimal risky portfolio depends on the risk preferences of individual investors E... View the full answer