1.You currently hold a portfolio of three stocks, Delta, Gamma, and Omega. Delta has a volatility of 60%, Gamma has a volatility of 30%, and Omega has a volatility of 20%. Suppose you invest 50% of your money in Delta, and 25% each in Gamma and Omega.
a. What is the highest possible volatility of your portfolio?
b. If your portfolio has the volatility in (a), what can you conclude about the correlation between Delta and Omega?
2.Suppose Ford Motor stock has an expected return of 20% and a volatility of 40%, and Molson Coors Brewing has an expected return of 10% and a volatility of 30%. If the two stocks are uncorrelated,
a. What is the expected return and volatility of an equally weighted portfolio of the two stocks?
b. Given your answer to (a), is investing all of your money in Molson Coors stock an efficient portfolio of these two stocks?
c. Is investing all of your money in Ford Motor an efficient portfolio of these two stocks?
3.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?