Question

You invest in a minimum variance portfolio of two stocks, F and XO. The expected return on F is 16% and its standard deviation is 20%. The expected return on XO is 10% and its standard deviation is 30%. F and XO are perfectly negatively correlated. The weight on XO in your portfolio is ___. A. 70% B. 30% C. 40% D. 60%

Answer 1

Given,

Expected return on F = 16%

Sandard deviation of F =20%

Expected return on XO =10%

standard deviation of XO = 30%.

For perfectly negatively correlated portfolios, minimum variance is zero with

weight of F= Standard deviation of XO/(Stdandard deviation of F + Stdandard deviation of XO)

weight of F= 30%/(20% + 30%)

weight of F= 60%

weight of XO= Standard deviation of F/(Stdandard deviation of F + Stdandard deviation of XO)

weight of XO= 20%/(20% + 30%)

Weight of XO= 40%

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