Problem 2 (10 marks). In the past four years, the annual returns of one company's stock

are 12%, 18%, and -14%, and 7%.

a) What is the geometric average return?

b) What is the arithmetic average of the returns?

c) According to an economist' forecast on the Year 2020, the probabilities of repeating

the performances of the former four years are 30%, 30%, 20%, and 20%, respectively.

What is the expected return of the stock in the Year 2020?

Problem 6 (10 marks). Suppose Intel's stock has an expected return of 26% and a volatility

of 50%, while Coca-Cola's stock has an expected return of 6% and a volatility of 25%. If

these two stocks were perfectly negatively correlated (i.e. their correlation is -1),

a) Calculate the portfolio weights that remove all risk.

b) What is the risk-free rate of interest in this economy?