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Question 3 0/1 pts You are trying to build the best possible risky portfolio for your investment clients. You have two risky

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Answer #1

The minimum variance portfolio is found by the following formula :

Ws = [\sigma2B - Cov(B,S)] / [\sigma2S + \sigma2B - 2Cov(B,S)],

where Ws = weight of stock

\sigmaB = standard deviation of bond.

\sigmas = standard deviation of stock.

Cov(B,S) = covariance of bond and stock

Cov(B,S) =  \rho *\sigmaB * \sigmas , where \rho = correlation between bond and stock.

Here, Cov(B,S) = -0.97 * 0.033 * 0.16 = -0.0051216

Ws = [0.0332 - (-0.0051216)] / [0.162 + 0.0332 - (2*(-0.0051216))]

Ws = 0.17

The proportion in stock = 0.17.

The proportion in bond = 1 - 0.17 = 0.83.

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