Suppose stock A has an expected return of 26% and a volatility of 50% while stock B has an expected return of 6% and volatility of 25%. These two stocks were perfectly negatively correlated (i.e., their correlation is -1) a) How to mix these two assets to create a portfolio with zero standard deviation? b) if there are no arbitrage opportunities, what is the risk-free rate of interest in this economy?
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Since the correlation between the two stocks is -1, we can use the formula for the portfolio standard deviation: Ļp = ā(wA^2 * ĻA^2 + wB^2 * ĻB^2 + 2 * wA * wB * Ļ * ĻA * ĻB) where Ļp is the portfolio standard deviation, wA and wB are the weights of stock A and Show moreā¦
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