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You have $50,000 in cash and you would like to allocate it between the common stock of Coca-Cola (KO) and Exxon Mobil Corp (XOM). You
You have $50,000 in cash and you would like to allocate it between the common stock of Coca-Cola (KO) and Exxon Mobil Corp (XOM). You know the risk-free rate is 1% and the market return is 9%. In addition, you have the following information about the two stocks: Coca-Cola (KO) Exxon (XOM) Mean Return 12.0% 20.0% Standard Deviation 21.0% 42.0% Cov(KO, XOM) -0.0010 1) If your goal is to minimize your portfolio risk, how much of your money (in dollar amount) should be invested in Coca-Cola and Exxon Mobil, respectively? 2) What is the mean return and variance of the minimum-variance portfolio in part 1)? 3) Instead of minimizing your portfolio risk, you decide to invest your money in the optimal risky portfolio that maximizes your return per unit of risk, i.e., the Sharpe ratio. How much of your money (in dollar amount) should now be invested in Coca-Cola and Exxon Mobil, respectively? 4) What is the mean return and variance of the optimal risky portfolio in part 3)
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