Question

you are considering investing in two securities. Security 1 has a expected return of 12% and a standard deviation of return of 10%. Security 2 has an expected return of 9%and a standard deviation of returns of 8%. The correlation coefficient of returns for the two securities is 0.3.

1. What would the weights be for each of the two securities in the minimum variance portfolio?

W₁=

W₂=

2. Given the weights computed in (a), compute the expected return and standard deviation of this minimum variance portfolio.

Expected return:

Standard deviation:

3. Would you recommend this minimum variance portfolio to an investor who would like to maximize the Sharpe ratio of his investment? Briefly Explain.

Answer 1

in the auesthien Seurity Sol As iven 2 Seusity 1 12/ E R) loy .8 O3 L. Seutity 1 Let Let assume 2 us assume би 64 ND.3 X to X & 24 nesk potfolio the minimum To constiut weights should lleisk be alculated (४.५) wn 8 2 214 + 8 Jo 2X 24 64 - 24 160 t64- 48 34 66

wr ERr t y Ey 34 X 12 t 66X 4.08 t E(R) b) S-94 lo.021. wx twy y X 134x(lo +(CCA () t 2x-3YX-66x o.3X10 X p 11-56 t 2.88 t lo-77 50-21 7.09 7. Compersation ter uit present ed risk is y Sharpe ato SR Standard doriation ll be Lower the betttolio the ShaipeRato . yhe higher ecommend the minimum invesstor ho Hense I uill wasiance potelio to an weuld natio marimize the Shape in uestmet want