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

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

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   7 %   45 %
B   10 %   55 %
  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.)

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