A. Suppose Intel's stock has an expected return of 10% and a volatility (standard deviation) of 5%, while Coca-Cola's has an expected return of 5% and volatility of 2%. Assume these two stocks have correlation coef?cient -1.
1. Calculate the portfolio weights that remove all risk.
2.If there are no arbitrage opportunities, what is the risk-free rate of interest in this economy?
B. A biotech company has a drug in development that will allow you to sell your ?rm for $10 billion next year. Assume your boss wants you to use the CAPM. Your ?rm has a beta of 4, the risk-free rate is 5% per year, and the equity premium is 2% per year. What do you think the ?rm is worth today?
C. Your borrowing rate is 15% per year. Your lending rate is 5% per year. The project costs $1,000 and has a rate of return of 10%.
1. Assume you have $500 of your own money to invest. Should you invest in this project?