Question

Consider two stocks, Stock D with an expected return of 11 percent and a standard deviation...

Consider two stocks, Stock D with an expected return of 11 percent and a standard deviation of 26 percent and Stock I, an international company, with an expected return of 9 percent and a standard deviation of 19 percent. The correlation between the two stocks is -.12. What is the weight of each stock in the minimum variance portfolio? (Round your answer to 4 decimal places.) Weight of Stock D Weight of Stock I

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Answer #1
To find the fraction of wealth to invest in Stock D that will result in the risky portfolio with minimum variance the following formula to determine the weight of Stock D in risky portfolio should be used

Where
Stock D E[R(d)]= 11.00%
Stock I E[R(e)]= 9.00%
Stock D Stdev[R(d)]= 26.00%
Stock I Stdev[R(e)]= 19.00%
Var[R(d)]= 0.06760
Var[R(e)]= 0.03610
T bill Rf= 12.00%
Correl Corr(Re,Rd)= -0.12
Covar Cov(Re,Rd)= -0.0059
Stock D Therefore W(*d)= 0.3637
Stock I W(*e)=(1-W(*d))= 0.6363
Where
Var = std dev^2
Covariance = Correlation* Std dev (r)*Std dev (d)
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