Question
Consider two risky investments with the following return distributions: Probability Return R1 (p.a.) 0.25 0.30 0.25 0.20 +12% +4% 5% 8% Expected return 1 =
Consider two risky investments with the following return distributions:
| Probability | Return R1 (p.a.) |
| 0.25 0.30 0.25 0.20 | +12% +4% 5% 8% |
| Expected return | 1 = 1.3500% |
| Volatility | 1 = 7.6176% |
| Probability | Return R2 (p.a.) |
| 0.30 0.30 0.20 0.20 | +10% +8% +3% 15% |
| Expected return | |
| Volatility |
The correlation between the returns of the two investments is 12 = 0.9.
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(a) Calculate 2 and 2. (Read the Instructions carefully.)
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(b) Express the portfolio squared volatility P2 in terms of w1, the weight of the first investment. (Round the coefficients to 6 decimals.)
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(c) Using your answer in part (b), find the weight w1 of the minimum-risk portfolio. Hence, find the expected return P and volatility P of the minimum-risk portfolio.
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