Question

Drew can design a risky portfolio based on two risky assets, Origami and Gamiori. Origami has an expected return of 13% and a standard deviation of 20%. Gamiori has an expected return of 6% and a standard deviation of 10%. The correlation coefficient between the returns of Origami and Gamiori is - 0.20 (negative 0.20). The risk-free rate of return is 2%. Among all possible portfolios constructed from Origami and Gamiori, what is the minimum variance?

Answer #1

Origami

Return = 13%

Standard deviation = 20%

Gamiori

Return = 6%

Standard deviation = 10%

Correlation = -0.20

Risk free rate of return = 2%

Plugging all these numbers in minimum variance portfolio calculator ( excel ), which you can find online.

The standard deviation of a minimum variance portfolio constructed with these 2 assets is 8.1%

Hence, the minimum variance is = standard deviation ^ 2

= 0.081 ^ 2

= 0.0065 or 0.65 %

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