Assume Stocks A and B have the following characteristics: The covariance between the returns on the two
Question:
Assume Stocks A and B have the following characteristics:
The covariance between the returns on the two stocks is .003.
a. Suppose an investor holds a portfolio consisting of only Stock A and Stock B. Find the portfolio weights, XA and XB, 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 stocks is −.05, what are the minimum variance weights?
d. What is the variance of the portfolio in part (c)?
Stock AB Expected Return 11% 15 Standard Deviation 43% 65
Step by Step Answer:
a The variance of a portfolio of two assets equals s X s X s 2X A X B CovAB Since the weights of the ...View the full answer
Corporate Finance
ISBN: 9781260772388
13th Edition
Authors: Stephen Ross, Randolph Westerfield, Jeffrey Jaffe
Related Video
Stocks (also known as equities) are securities that represent ownership in a company. They are issued by companies to raise capital, and when an individual buys stocks, they become a shareholder in that company. Investing in stocks can be a way for individuals to potentially earn a return on their investment through dividends and capital appreciation. However, investing in stocks also carries a level of risk, as the value of the stock can fluctuate based on various factors such as the financial performance of the company and general market conditions. For companies, issuing stocks can be a way to raise funds for growth and expansion. When a company goes public by issuing an initial public offering (IPO), it can raise significant capital by selling ownership stakes to the public. Companies can also issue additional stock offerings to raise additional capital as needed.
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