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Suppose you have two stocks, A and B, with expected returns E(RA) = 10% and E(RB)= 15%, and variances = 0.15 and = 0.25.

Suppose you have two stocks, A and B, with expected returns E(RA) = 10% and E(RB)= 15%, and variances = 0.15 and = 0.25. In addition, the returns for these two stocks are perfectly negatively correlated. What must the risk-free rate of return be in this economy so that there are no arbitrage opportunities?

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