Lets assume that currently a price of a stock is $40. At the end of a year, the price will change to either $50 (=40X1.25) or $32 (=40X0.8). A call option on this stock has an exercise (strike) price of $35 with one year maturity. A riskless security has a 8% return.

9. You would like to create riskless portfolio by buying a certain number of stocks and selling a call option. How many stocks do you need to buy to set up a riskless portfolio (a fraction)?