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.)

I know the weight of stock d is not 17.68% & weight of stock I is not 82.32%

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

Covariance = correlation coefficient * SD of D * SD of I

                    = - .10 * 37 * 17

                   =- 62.90

Weight Of D =( SD of I)^2 - COVariance / (SD ofI)^2 + (SD of D)^2 - 2*Covariance

                        = (17)^2 - (- 62.90) / (17)^2 + (37)^2 -   2*62.90

                        = 289   + 62.90 / (289+ 1369- 125.8)

                        = 351.90 / 1532.2

                        = .2297 or 22.97%

Weight of I = 1 - .2297 = .7703 or 77.03%

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