# Question: Assume stocks A and B have the following characteristics The covariance

Assume stocks A and B have the following characteristics:

The covariance between the returns on the two stocks is .01.

a. Suppose an investor holds a portfolio consisting of only stock A and stock B. Find the portfolio weights, XA and XB , such that the variance of his portfolio is minimized. Remember that the sum of the two weights must equal 1.

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

c. If the covariance between the returns on the two stocks is –.15, what are the minimum

variance weights?

d. What are the variance and standard deviation of the portfolio in part (c)?

The covariance between the returns on the two stocks is .01.

a. Suppose an investor holds a portfolio consisting of only stock A and stock B. Find the portfolio weights, XA and XB , such that the variance of his portfolio is minimized. Remember that the sum of the two weights must equal 1.

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

c. If the covariance between the returns on the two stocks is –.15, what are the minimum

variance weights?

d. What are the variance and standard deviation of the portfolio in part (c)?

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

Based on the following information, calculate the expected return. Filer Manufacturing has 7.5 million shares of common stock outstanding. The current share price is $49, and the book value per share is $4. Filer Manufacturing also has two bond issues outstanding. The first bond issue has a ...1. What would a technical analyst say about market efficiency? 2. A technical analysis tool that is sometimes used to predict market movements is an investor sentiment index. AAII, the American Association of Individual ...Repeat parts (a) and (b) in Problem 1 assuming Beckett has a tax rate of 35 percent. In problem a. Calculate earnings per share, EPS, under each of the three economic scenarios before any debt is issued. Also, calculate the ...In Problem 4, use MM Proposition I to find the price per share of equity under each of the two proposed plans. What is the value of the firm? In problem Yasmin Corporation is comparing two different capital structures, an ...Post your question