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Find the expected return on the zero-risk portfolio

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Shares of Zoom Video Communications (ZOOM) and Norwegian Cruise Line Holdings (NCLH) are two risky securities. The expected return of ZOOM is 6%, and its standard deviation is 7%. The expected return of NCLH is 4%, and its standard deviation is 5%. The returns on ZOOM and NCLH are perfectly negatively correlated (ρZOOM,NCLH = -1).

(a) What fractions of an investor's wealth should be held in ZOOM and NCLH in order to produce a zero-risk portfolio?

(b) What is the expected return on the zero-risk portfolio?

(c) Suppose that the risk-free T-bill rate is equal to 3%. How would you set up an arbitrage trade?

Reference no: EM133073661

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