Consider two stocks, Stock D, with an expected return of 19 percent and a standa

Question

Consider two stocks, Stock D, with an expected return of 19 percent and a standard deviation of 35 percent, and Stock I, an international company, with an expected return of 10 percent and a standard deviation of 15 percent. The correlation between the two stocks is –.04. What are the expected return and standard deviation of the minimum variance portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Consider two stocks, Stock D, with an expected return of 19 percent and a standard deviation of 35 percent, and Stock I, an international company, with an expected return of 10 percent and a standard deviation of 15 percent. The correlation between the two stocks is –.04. What are the expected return and standard deviation of the minimum variance portfolio? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Answer:-

W1=15/15+35=.30

W2=35/15+35=.70

The expected return of this portfolio is

E[rp] = (0.30) 19 + (0.70) 10 = 12.70%

The variance of this portfolio is given by

(0.30)2(35)2 + (0.70)2(15)2 + 2 (0.30)(0.70)(-.04)(35)(15) = 211.68

so the standard deviation is 14.55%.

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