The stock of Bruin, Inc., has an expected return of 17 percent and a standard de

Question

The stock of Bruin, Inc., has an expected return of 17 percent and a standard deviation of 32 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 47 percent. The correlation between the two stocks is .34. Calculate the expected return and standard deviation of the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

The stock of Bruin, Inc., has an expected return of 17 percent and a standard deviation of 32 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 47 percent. The correlation between the two stocks is .34. Calculate the expected return and standard deviation of the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Ans-

Weight is not given so it is taken 0.5

Bruin expected return 17% & standard deviation 32%

Wildcat expected return 12% & standard deviation 47%

The correlation between the two stocks 0.34

expected return of portfolio=w1R1 + w2R2

=0.5*0.17+0.5*0.12

   =0.145 OR 14.5%

standard deviation of portfolio={(w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cov(RA, RB)}1/2

=(0.52*0.322+0.52*0.472+2*0.5*0.5*0.32*0.47*0.34)1/2

  =(0.026+0.055+0.0256)1/2

   =(0.106)1/2

=0.33 OR 33%

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