Question 11

Stock A and Stock B have returns that are perfectly positively correlated (=1). Stock A has an expected return equal to 5.67% and a standard deviation of the return equal to 13%. Stock B has an expected return equal to 7.11% and a standard deviation of the return equal to 20%. Assume you only invest in these two stocks, what are the portfolio weights for the two stocks that give a portfolio whose return is risk free?

A. XA=50.24%; XB=-150.24%

B. XA=-50.24%; XB=150.24%

C. XA=-285.71%; XB=185.71%

D. XA=285.71%; XB=-185.71%

Question 13

Assume the market interest rate for a risk free loan is 3.00%. Firm X is willing to either borrow or lend 1000 Euros now for 1040 Euros one year from now. How can you secure a risk-free profit without using any money of yours (arbitrage)?

A. Borrow from Firm X and invest at the market interest rate B. Borrow at the market interest rate and lend to Firm X C. Borrow from both from Firm X and at the market interest rate at the same time D. It is impossible to obtain a risk free profit without investing your own money E. I choose not to answer