Question

How do I find the weight of stock X and Y, in the following?

Problem 2
	Stocks	X	Y
	Expected return	19%	7%
	Std.	24%	16%
	Correlation	-1
	Variance	0,0576	0,0256
	Weight

Answer 1

here given correlation between two stocks = -1

when correlation is -1 ,through an optimum portfolio the risk can be reduced to '0'

( it is assumed that the question requires portfolio with standard deviation of 0)

so the weights can be calculated using the following formula

Weight of X = standard deviation of Y / (standard deviation of X + standard deviation of Y)

weight of Y = standard deviation of X / (standard deviation of X + standard deviation of Y)

using the above formula

Weight of X = 16 / (24 + 16) = 16/ 40

= 0.4 or 40%

Weight if Y = 24 / (24 + 16) = 24 / 40

= 0.6 or 60%