Suppose Intels stock has an expected return of 20% and a volatility of 30%, while Coca-Colas has

Question:

Suppose Intel’s stock has an expected return of 20% and a volatility of 30%, while Coca-Cola’s has an expected return of 7% and volatility of 30%. If these two stocks were perfectly negatively correlated (i.e., their correlation coefficient is -1),

a. Calculate the portfolio weights that remove all risk.

b. If there are no arbitrage opportunities, what is the risk-free rate of interest in this economy?

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Cyrus Sandoval

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