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A stock portfolio has an expected return of 12% and a standard deviation of 20%. A...

  1. A stock portfolio has an expected return of 12% and a standard deviation of 20%. A bond portfolio has an expected return of 6% and a standard deviation of 9%. The two portfolios have a correlation coefficient of 0.3. T-Bills have an expected return of 2%. Your coefficient of risk aversion is 7. (15 points)
  1. What are the weights of the minimum variance portfolio that can be formed between the two portfolios if they are the only risky assets being considered?
  1. What is the expected return and standard deviation of the minimum variance portfolio?
  1. How much should you allocate between T-Bills and the risky portfolio?
  1. What is the expected return and standard deviation of your complete portfolio?

Solutions

Expert Solution

Pab is the coefficient of correlation

W(r) is weight of the risky portfolio

W(rf) is weight of risk free asset

Standard deviation (sigma) of p is the standard deviation of risky portfolio

The standard deviation of complete portfolio does not have risk free asset in consideration as risk free asset has zero deviations.

jeff jeffy answered 5 months ago
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