Question

11-2

The stock of Bruin, Inc., has an expected return of 27 percent and a standard deviation of 40 percent. The stock of Wildcat Co. has an expected return of 14 percent and a standard deviation of 45 percent. The correlation between the two stocks is 0.45. Calculate the expected return and standard deviation of the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places.)

	QUESTION ANSWER BELOW Expected return ______________________% Standard deviation ______________________%

Answer 1

Stock bruin is A

Stock wildcat co. is B

Covariance (A,B) = Correlation (A,B) x Standard Deviation A x Standard Deviation B

Covariance (A,B) = 0.45 x 40 x 45 = 810

Weight of Security A =

Weight of Security A =

                                 

Weight of Security A = 1215/5630 = 0.2158

Weight of Security A is 0.2158

Weight of Security B = 1-0.2158 = 0.7842

Expected Return of Portfolio = 0.2158 * 27 + 0.7842* 14 = 16.8054%

S.D. of portfolio = (wA2 *σA2 + wB2 *σB2 + 2*wA*wB*σA*σB*corrAB)1/2

S.D. of portfolio = ((0.2158)2(40)2 + (0.7842)2 (45)2 +2*0.2158*0.7842*40*45*0.45)1/2

S.D. of Potfolio = (1593.9781)1/2 =39.92%

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