Suppose Intel’s stock has an expected return of 26% and a volatility of 50%, while Coca-Cola’s has an expected return of 6% and volatility of 25%. If these two stocks were perfectly negatively...

Suppose Intel’s stock has an expected return of 26% and a volatility of 50%, while Coca-Cola’s has an expected return of 6% and volatility of 25%. 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?

For Problems 23–26, suppose Johnson & Johnson and the Walgreen Company have expected returns and volatilities shown below, with a correlation of 22%.

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23

Calculate (a) the expected return and (b) the volatility (standard deviation) of a portfolio that is equally invested in Johnson & Johnson’s and Walgreen’s stock.

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26

Using the same data as for Problem 23, calculate the expected return and the volatility (stan- dard deviation) of a portfolio consisting of Johnson & Johnson’s and Walgreen’s stocks using a wide range of portfolio weights. Plot the expected return as a function of the portfolio volatility. Using your graph, identify the range of Johnson & Johnson’s portfolio weights that yield effi- cient combinations of the two stocks, rounded to the nearest percentage point.