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:

Natural Selection

A process by which organisms better adapted to their environment tend to survive and produce more offspring.

Optimal Foraging

The process of obtaining food in a manner that maximizes benefits and/or minimizes costs.

Reproductive Success

The number of offspring an organism or genetic trait produces over its lifetime, contributing to the genetic makeup of future generations.

Foraging Time

The period spent by an animal searching for and gathering food.