# Question: Assume Stocks A and B have the following characteristics

Assume Stocks A and B have the following characteristics:

The covariance between the returns on the two stocks is .001.

a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B. Find the portfolio weights, X A and X B, such that the variance of her portfolio is minimized.

b. What is the expected return on the minimum variance portfolio?

c. If the covariance between the returns on the two stocks is 2.05, what are the minimum variance weights?

d. What is the variance of the portfolio in part(c)?

The covariance between the returns on the two stocks is .001.

a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B. Find the portfolio weights, X A and X B, such that the variance of her portfolio is minimized.

b. What is the expected return on the minimum variance portfolio?

c. If the covariance between the returns on the two stocks is 2.05, what are the minimum variance weights?

d. What is the variance of the portfolio in part(c)?

**View Solution:**## Answer to relevant Questions

You are discussing your 401(k) with Dan Ervin when he mentions that Sarah Brown, a representative from Bledsoe Financial Services, is visiting East Coast Yachts today. You decide that you should meet with Sarah, so Dan sets ...In contrast to the CAPM, the APT does not indicate which factors are expected to determine the risk premium of an asset. How can we determine which factors should be included? For example, one risk factor suggested is the ...The following three stocks are available in the market: Assume the market model is valid. a. Write the market model equation for each stock. b. What is the return on a portfolio with weights of 30 percent Stock A, 45 ...Shanken Corp. issued a 30-year, 6.2 percent semiannual bond 7 years ago. The bond currently sells for 108 percent of its face value. The company’s tax rate is 35 percent. a. What is the pretax cost of debt? b. What is the ...Och, Inc., is considering a project that will result in initial aftertax cash savings of $3.5 million at the end of the first year, and these savings will grow at a rate of 4 percent per year indefinitely. The firm has a ...Post your question