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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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