Question

Assume two risky assets A and B with correlation ρ=-1.00.Their respective returns and volatilities are,

Asset	Expected Return (%)	Volatility
A	7.00	0.0010
B	5.00	0.0005

Compute the return and volatility of the minimum-variance portfolio.

Select one:

a. Return: 5.67%; volatility: 0.0%

b. No answer

c. Return: 7.12%; volatility: 0.0%.

d. Return: 7.12%; volatility: 3.21%.

e. Return: 5.67%; volatility: 3.21%.

Answer 1

Answwr a. Return: 5.67%; volatility: 0.0%

Voltality = Standard Deviation

If r = -1, the weight of securities in portfolio can be calculated as follows:

Weight of A = SD of B / (SDa + SDb) = 0. 0.0005 / (0.0010+ 0.0005) = 0.333333 or 1/3

and Weight of B = 1 - Wa = 1 - 1/ 3= 2/3. Calculation of Portfolio Return and voltality is shown below: