Question: Your client wants to construct a portfolio from two stocks (Stocks Y and Z) and has asked you to determine the portfolio weights for each

  1. Your client wants to construct a portfolio from two stocks (Stocks Y and Z) and has asked you to determine the portfolio weights for each stock that will generate the portfolio with the smallest standard deviation. Use the relevant information in the table below to calculate the standard deviation for each portfolio weighting scenario and indicate the scenario that you should recommend to your client.

Stock Y

Stock Z

Portfolio Weighting Scenario 1

60%

40%

Portfolio Weighting Scenario 2

70%

30%

Portfolio Weighting Scenario 3

80%

20%

Standard Deviation

9%

6%

Covariance Between Stocks Y and Z

-0.003

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