Assume A and B have the following characteristics:

The covariance between the returns on the two equities is 0.001.

(a) Suppose an investor holds a portfolio consisting of only A and 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 equities is –0.02, what are the minimum variance weights?

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

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Equity A B Expected Return (%) 5 10 Standard Deviation (%) 10 20