14. Suppose that many stocks are traded in the market and that it is possible to...
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14. Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rp. The characteristics of two of the stocks are as follows: Stock A B Correlation=-1 Expected Return Standard Deviation 8% 40% 13 60 Could the equilibrium r, be greater than 10%? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (LO 6-3) 14. Suppose that many stocks are traded in the market and that it is possible to borrow at the risk-free rate, rp. The characteristics of two of the stocks are as follows: Stock A B Correlation=-1 Expected Return Standard Deviation 8% 40% 13 60 Could the equilibrium r, be greater than 10%? (Hint: Can a particular stock portfolio be formed to create a "synthetic" risk-free asset?) (LO 6-3)
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