Suppose that among the many stocks in the market there are two securities, A and B, with the following characteristics A has E(Ra) 08 and 4 and B has E(Rb) 18 and 6 Suppose the correlation between these two is 1 and that it is possible to borrow and lend at the risk free rate, rf What must be the equilibrium risk free rate

Question: Suppose that among the many stocks in the market there are two securities, A and B, with the following characteristics: A has E(Ra) = .08

Suppose that among the many stocks in the market there are two securities, A and B, with the following characteristics: A has E(Ra) = .08 and σ =.4 and B has E(Rb) = .18 and σ =.6. Suppose the correlation between these two is ρ = −1 and that it is possible to borrow and lend at the risk-free rate, rf.

What must be the equilibrium risk-free rate?

Step by Step Solution

★★★★★

3.46 Rating (153 Votes )

There are 3 Steps involved in it

1 Expert Approved Answer

Step: 1 Unlock

SOLUTION The equilibrium riskfree rate is determined by the Capital Asset Pricing Model CAPM Accordi... View full answer

Question Has Been Solved by an Expert!

Get step-by-step solutions from verified subject matter experts

Step: 2 Unlock

Step: 3 Unlock

Students Have Also Explored These Related Finance Questions!

Managing Scope Changes Case Study Scope changes on a project can occur regardless of how well the project is planned or executed. Scope changes can be the result of something that was omitted during...

KYC's stock price can go up by 15 percent every year, or down by 10 percent. Both outcomes are equally likely. The risk free rate is 5 percent, and the current stock price of KYC is 100. (a) Price a...

The following additional information is available for the Dr. Ivan and Irene Incisor family from Chapters 1-5. Ivan's grandfather died and left a portfolio of municipal bonds. In 2012, they pay Ivan...

Steam leaves a nozzle with a pressure of 500 kPa, a temperature of 350C, and a velocity of 250 m/s. What is the isentropic stagnation pressure and temperature?

One observer argues that external equity should always be the primary concern in compensation, noting that it attracts the best employees and prevents the top performers from leaving.

Problems 113122. The purpose of these problems is to keep the material fresh in your mind so that you are better prepared for later sections, a final exam, or subsequent courses such as calculus....

1. Model respect for diversityby expressing admiration for a students bilingual ability, by commenting enthusiastically about the number of different languages that are represented in the class, and...

The following data are taken from the general ledger and other records of Viejas Manufacturing Co. on January 31, the end of the first month of operations in the current fiscal year: Sales . . . . ....

Exercise 13.4 (Algo) Preparing a statement of owner's equity. LO 13-2 The worksheet of Bridget's Office Supplies contains the following revenue, cost, and expense accounts. The merchandise inventory...

10. Classifying Processed Images into Multiple Classes Introduction We have processed images to represent as a vector of 300 attributes. The first 294 are decimal values in the range 0 to 1...

El salario de Roberto es de $133,200 en 2019. A Roberto se le paga quincenalmente, es soltero y reclama una asignacin. Suponga que su empleador utiliza el mtodo de porcentaje de retencin. Utilice las...

Question 26 2 Points Dalal faces a reoccurring situation every month, introducing a new product. Accordingly, she created a complex integration mechanism, a permanent committee responsible for...

An electronics company headquartered in India, manufacturer & supplier of semiconductor chips to automobile companies across Europe, US and Asia- the Pacific. Looking at the product market demand...

analysis should relate the authors of the article to the perspective of the textbook. You may also relate it to your own experiences. This section may vary depending upon what you choose to focus on....

calculate the distributed force on surfaces of any height in units of t / m . 5m distributed force 15m 6m density = 1025 kg/m3 g = 9.81 10m

The kinematic structure of a 3 DOF snow plowing robot is shown below at its home configuration. Coordinate frames are attached to the individual links, as shown in the figure below. Joint 1 is a...

Misrepresentation of law does not ordinarily entitle a party to avoid a contract. a . True b . False

Outline a general process applicable to most control situations. Using this, explain how you would develop a system to control home delivery staff at a local pizza shop.

Camp Douglas Dirigibles has a bond outstanding with four years to maturity, a face value of $1,000, and an annual coupon payment of $100. What is the price of the Camp Douglas bond if its...

Rank the various money market instruments discussed in the text in terms of default risk. Explain the reasoning behind your rankings. Find the latest interest rates for these securities. Do they...

Consider the following annual returns produced by a MiniFund, a mutual fund investing in small stocks: Referring to Table 1.1, use the Treasury bill returns as the riskfree return and the common...

6. If schizophrenia is due to abnormal brain development, why do behavioral symptoms not become apparent until later in life?

2. Has the reported prevalence of schizophrenia been increasing, decreasing, or staying the same?

11. What are the advantages of light treatment compared to antidepressant drugs?