Deck 30: Portfolio Optimization with Negative Correlation: Finding Minimum Variance and Weight Allocation

Question 1

Refer to Exhibit 7B.1.What is the value of W₁ when r₁.₂ = -1 and E(s₁)= .10 and E(s₂)= .12?

A) 45.46%
B) 50.00%
C) 59.45%
D) 54.55%
E) 74.55%

Answer 1

D
W₁ = 12/(.12 + .10)= .5455 = 54.55%

Question 2

Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r₁.₂ = -1.

A) E(s1) ¸ [E(s1) + E(s2)]
B) E(s1) ¸ [E(s1) - E(s2)]
C) E(s2) ¸ [E(s1) + E(s2)]
D) E(s2) ¸ [E(s1) - E(s2)]
E) None of the above

Answer 2

C