Suppose that many stocks are traded in the market and that it is possible to borrow at
Question:
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?
Essentials of Investments
ISBN: 978-0078034695
9th edition
Authors: Zvi Bodie, Alex Kane, Alan Marcus