Question

Let the random variable X denote the annual return from investing in Xerox Corporation and let the random variable Y denote the annual return from investing in Yelp Corporation. From historical data you can calculate that:

Means: mean_X = 1.10 and mean_Y = 1.10

Standard Deviations: sigma_X = 0.08 and sigma_Y = 0.04

The correlation between X and Y is r=-0.75

Suppose that we invest a fraction "alpha" of our money in Xerox Corporation and the remaining fraction (1 - alpha) in Yelp Corporation. Let Z denote the annual return of this portfolio: Z = alpha X + (1 - alpha)Y.

Which of the following value of "alpha" achieves the minimum variance for the portfolio.

Alpha = 1

Alpha = 0.3

Alpha = 0.6

Alpha = 0

Answer 1