In: Finance
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.
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)