Question

Suppose you can form portfolios using only two stocks. Stock A and stock B, with the following characteristics:(Total 15 points), , E(rA)=17% E(rB)=12% pab=0.2 Oa=30% Ob=20%. Find the portfolio weight on stock A that gives you a two-stock portfolio that has a standard deviation of 22%. (10 points) Hint: you will find two solutions and you should pick the efficient one

Answer 1

I have used the Solver tool in EXCEL to find the portfolio weights:

1) we will use standard equal weights for both A & B in portfolio and calculate standard deviation of portfolio using equal weights for both.

2) then we will use the solver tool and set the objective function, the calculated standard deviation in the first step and set it equal to a value of 22% or 0.2, then we will set some constraints that the weights of the portfolio should be within.

the constraints will be:

sum of weights of A and B in portfolio should be = 1

weight of each stock A and B should be > 0 ( non-negative)

3) then we will click on solve and we will get the following answer:

Hence the weight of A = 65.02% and weight of B = 34.98% for the portfolio standard deviation = 0.22