Consider two stocks, Stock D, with an expected return of 21 percent and a standa

Question

Consider two stocks, Stock D, with an expected return of 21 percent and a standard deviation of 37 percent, and Stock I, an international company, with an expected return of 7 percent and a standard deviation of 17 percent. The correlation between the two stocks is –.10. What is the weight of each stock in the minimum variance portfolio? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Consider two stocks, Stock D, with an expected return of 21 percent and a standard deviation of 37 percent, and Stock I, an international company, with an expected return of 7 percent and a standard deviation of 17 percent. The correlation between the two stocks is –.10. What is the weight of each stock in the minimum variance portfolio? (Do not round intermediate calculations. Round your answers to 4 decimal places.)

Explanation / Answer

Stock Return Std Deviation Cor coeff Stock D 21.00% 37.00% -0.01 Stock I 7.00% 17.00% Weight of Stck D = (std dev I^2 -std dev I.Std devD. Corr.Coeff ID)/(std dev I^2+Std devD^2 -2*std dev D*Std Dev I*CorrCoeff I&D)          =(0.17^2-0.17*0.37*-0.01)/(0.17^2+0.37^2-2*0.17*0.37*-0.01)                         = 17.68% So weight of Stock D in minimum variance portfolio is 17.68% So weight of Stock I in minimum variance portfolio is 82.32%

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