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

This problem can be solved using functions in excel. Assuming risk free rate of 5%

The calculations for the matrix are

Std^2 of Asset A: (0.37)^2=0.1369   

Std of aseet A*std of Aseet B* correlation between A and B:(0.3*0.17*-0.1)=-0.0063

Std of aseet A*std of Aseet B* correlation between A and B:(0.3*0.17*-0.1)=-0.0063

std^2 of asset B= (0.17)^2=0.0289

Weights

Weight 1 :MMULT(MINVERSE(A11:B12),A28:A29)/SUM(MINVERSE(A11:B12))

Weight 2: MMULT(MINVERSE(A11:B12),A28:A29)/SUM(MINVERSE(A11:B12))

(A11:B12) is the covariance matrix

A28:A29 is (1,1)

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