5 We must invest all our money in two stocks: x and y. The variance of the...

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5 We must invest all our money in two stocks: x and y.

The variance of the annual return on one share of stock x is var x, and the variance of the annual return on one share of stock y is var y. Assume that the covariance between the annual return for one share of x and one share of y is cov(x, y). If we invest a% of our money in stock x and b% in stock y, then the variance of our return is given by a2var x b2var y 2ab cov(x, y). We want to minimize the variance of the return on our invested money. What percentage of the money should be invested in each stock?

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