Question
Stocks that move perfectly with the market have a beta of 1. Betas get higher as volatility goes up and lower as it goes down.
Stocks that move perfectly with the market have a beta of 1. Betas get higher as volatility goes up and lower as it goes down. Thus, Southern Co., a utility whose shares have traded close to $12 for most of the past three years, has a low beta. At the other extreme, theres Texas Instruments, which has been as high as $150 and as low as its current $75.
2. Assume that there are two stocks with the following characteristics. The covariance between the returns on the stocks is 0.001.
| Expected Return | Standard Deviation |
A | 0.05 | 0.1 |
B | 0.10 | 0.2 |
a. What is the expected return on the minimum variance portfolio? (Hint: Find the portfolio weights XA and XB such that the portfolio variance is minimized. Remember that the sum of the weights must equal 1.)
b. If Cov(RA, RB)= -0.02, what are the minimum variance weights?
c. What is the portfolio variance when Cov(RA, RB) =-0.02?
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