Question (2) (Minimum Variance Frontier with two risky asset) (5 points) Suppose there are two risky securities in the market with the following characteristics: Asset E(R) O(R) D: Dell 16% 20% I: IBM 10% 15% 2 Handout 2: Portfolio Management and Performance Evaluation and suppose the correlation between the returns of Dell and IBM is 0.6 (i.c. pp.1 = 0.6) (a) Let Xo be the fraction of the wealth that you invest in Dell. As in class, consider a portfolio P that combines these two stocks. Thus the returns on this portfolio are given by Rp = XDRD + (1 - XD)R. What is the expected return on this portfolio P (leave the answer as a function of Xp)? What is the standard deviation of this portfolio (again leave it as function of XD)? (b) Using your answer from the previous question, fill the values in the following table: XDE(R) (R) +++ -0.5 0 0.5 1 1.5 (c) Given the values that you just found out in the previous question, plot the minimum-variance frontier composed of these two assets (hint: you can easily do this in Excel but if you prefer you can do it by hand). Which part of this Minimum Variance Frontier is efficient? (d) What is the "Minimum Variance Portfolio" (MVP) of these two stocks? Mark this portfolio on the minimum variance frontier (from previous question)