Deck 6: An Introduction to Portfolio Management: Part A

Question 1

-Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r_1.2 = 1.

A) E( $\sigma$ 2) $\div$ [E( $\sigma$ 1) -E( $\sigma$ 2)]
B) E( $\sigma$ 2) $\div$ [E( $\sigma$ 1) + E( $\sigma$ 2)]
C) E( $\sigma$ 1) $\div$ [E( $\sigma$ 1) - E( $\sigma$ 2)]
D) E( $\sigma$ 1) $\div$ [E( $\sigma$ 1) + E( $\sigma$ 2)]
E) None of these are correct.

Answer 1

E( $\sigma$ 2) $\div$ [E( $\sigma$ 1) -E( $\sigma$ 2)]

Question 2

-Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r_1.2 = .60, E( $\sigma$ 1) = .10 and E( $\sigma$ 2) = .16?

A) .0244
B) .3679
C) .5697
D) .6309
E) .9756

Answer 2

.9756