Question: Check my workCheck My Work button is now enabled1 Item2 Item 2 4 points Suppose that many stocks are traded in the market and that

Check my workCheck My Work button is now enabled1

Item2

Item 2 4 points

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

Stock Expected Return Standard Deviation
A 9 % 60 %
B 5 % 40 %
Correlation = 1

a. Calculate the expected rate of return on this risk-free portfolio? (Hint: Can a particular stock portfolio be substituted for the risk-free asset?) (Round your answer to 2 decimal places.)

b. Could the equilibrium r be greater than 6.60%?

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