Consider the Following Data for Assets a and B $\bar { R } _ { A } = 12 \%$

question 26

Essay

Consider the following data for assets A and B: $\bar { R } _ { A } = 12 \%$ ; $\bar { R } _ { B } = 8 \%$ ; $\sigma _ { \mathrm { A } } = 10 \%$ ; $\sigma _ { B } = 4 \%$ ; $\rho _ { A B } = - 1.0$
a. If only assets A and B are available, draw the efficient frontier.
b. If the riskless lending and borrowing rate is 10%, why is this a disequilibrium situation and what is the arbitrage that will restore equilibrium?

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Definitions:

Negative Punishment

A behavior modification technique involving the removal of a desirable stimulus to decrease the probability of an undesirable behavior being repeated.

Negative Reinforcement

A process that strengthens a behavior by removing or reducing an undesirable outcome when the behavior is performed.

Positive Reinforcement

The process of increasing the likelihood of a behavior by following it with the addition of a pleasurable stimulus or reward.

Negative Punishment

A behavior modification technique involving the removal of a desirable stimulus after a particular behavior is exhibited, with the intention of decreasing that behavior.