Question

The correlation coefficient between two assets 1 and 2 is +0.30, and other data are given in the following table:

Asset	E(r)	σ
1	10%	15%
2	25%	20%

(Show your answers in decimal form. Keep 4 decimal places to all your answers except for (4), e.g. 0.1234)

a) If one invests 40% in asset 1 and 60% in asset 2, what are the portfolio's expected rate of return and standard deviation?

         Expected rate of return: _0.1900_ Standard deviation: _0.1494_

b) Find the proportion α of asset 1 and (1 - α) of asset 2 that define a portfolio having minimum standard deviation.

Asset 1:_______ ;       Asset 2:_______ ;      

c) What is the expected rate of return and the standard deviation of the minimum variance portfolio found in (2)?

Expected rate of return: _______ Standard deviation: ________

d) Compare the two portfolios in parts (1) and (3). Is one preferred over the other? Explain! ___________.

        ("0" for no preference, "1" for preference of the one in (1), "2" for the one in (3).)

Answer 1