Consider Ford stock (F) with a current price of $20 per share and a standard deviation of returns of 15%.
General Motors (GM) stock has an expected return of 12% and a standard deviation of returns of 16%.
a) An investor expects to sell Ford stock in one year at $21 per share and expects the firm to pay a dividend of $1 per share at the end of the year. What is the expected total return and what is the dividend yield?
b) An investor holds a portfolio of F and GM with 80% of the portfolio in Ford. What is the standard deviation of this portfolio if Ford and GM have a correlation of -1?
c) Given the correlation of Ford and GM stock, can an investor construct a zero variance portfolio? If so, what are the weights on F and GM in this portfolio? If not, explain why?
d) Given your answer in c), what is the risk-free rate? Why?