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Assume analysts provide the following types of information. Assume short sales are allowed. Stock Mean Return...

Assume analysts provide the following types of information. Assume short sales are allowed.

Stock Mean Return Standard Deviation
A 10% 8%
B 12% 10%
C 18% 16%
risk free rate 5%

The pairwise coefficient of correlation between all three stocks is 0.5, i.e. ρAB=ρAC=ρBC=0.5.

a) What the rate of return and the standard deviation of an equal weighted portfolio consist of all three stocks?

b) What is the minimum variance portfolio of A and B? What is the standard deviation of this portfolio? Explain briefly why the standard deviation of the portfolio is lower than that of A and B.

c) Find the weights of stock A, B and C in the efficient portfolio.

Solutions

Expert Solution

a)b)

A minimum variance portfolio is a collection of securities that combine to minimize the price volatility such as standard deviation of the overall portfolio. Here the weights are found for portfolio A and B with the help of minimum variance portfolio, such that the standard deviation is minimised. So, the standard deviation of the portfolio is lower than that of A and B.

c)

jeff jeffy answered 1 year ago
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