Minimum Variance Portfolio Assume A and B have the following characteristics:

Equity Expected Return (%) Standard Deviation (%)

A 5 10 B 10 20 The covariance between the returns on the two equities is 0.001.

(a) Suppose an investor holds a portfolio consisting of only A and B. Find the portfolio weights, XA and XB, such that the variance of her portfolio is minimized. (Hint: Remember that the sum of the two weights must equal 1.)

(b) What is the expected return on the minimum variance portfolio?

(c) If the covariance between the returns on the two equities is −0.02, what are the minimum variance weights?

(d) What is the variance of the portfolio in part (c)?