Question

You are going to invest in Asset J and Asset S. Asset J has an expected return of 11.2 percent and a standard deviation of 52.2 percent. Asset S has an expected return of 8.2 percent and a standard deviation of 17.2 percent. The correlation between the two assets is .50. What are the standard deviation and expected return of the minimum variance portfolio?

Answer 1

Answer:

7.98%

8.61%

Explanation:

wj = [(0.172)² - 0.50x0.522x0.172)/((0.522)²+(0.172)²-2x0.50x0.522x0.172]

= - 0.07211

Expected returns

= (-0.07211)x 0.112+(1-(-0.07211))x0.082

= 7.98367%

Standard deviation

=√((-0.07211)x(0.522²+((1-(-0.07211))x0.172)²+2x(-0.07211)x(1-(-0.07211))x0.522x0.172x0.5)

This gives us a standard deviation of

= 8.61054%

The expected return = 7.98%

The standard deviation = 8.61%