Question

Refer to the table below: Down Co. 3 Doors, Inc. 14% 42 10% Expected return, E(R) Standard deviation, o Correlation 31 0.10 Using the information provided on the two stocks in the table above, find the expected return and standard deviation on the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.) Expected return Standard deviation

Answer 1

Elrs) = 14% E(rb) = 10% std (s) 42% std (B) 31% correlation 0.1 Covariance matrix: (cov r,s) = correlation x std (s) x std (b) 3 Door Inc Down co 961 130.2 130.2 1764 3 Door Inc Down co Minimum variance portfolio: Wmin(3D) (variance (B) - cov(rs,rb))/(variance (s) +variance (B) - 2 cov (rs,rb) 0.3371 Wmin(D) = 1-0.3371 = 0.6629 Minimum variance portfolio expected return = 11.35% (Wmin(s) x E(rs) + Wmin(b) x E(rb) Standard deviation = [(Ws^2 x variance 5+ WB^2 x variance B+ 2 x WS X WB X Cov (rs,rb)]^(1/2) 26.0949% Expected return = Standard deviation = 11.35% 26.09%