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Exhibit 7B -Refer to Exhibit 7B

Question 2

Multiple Choice

Exhibit 7B.l
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The general equation for the weight of the first security to achieve the minimum variance (in a two stock portfolio) is given by:
W1=[E(σ1) 2r1.2E(σ1) E(σ2) ]÷[E(σ1) 2+E(σ2) 22r1.2E(σ1) E(σ2) ]\mathrm { W } _ { 1 } = \left[ \mathrm { E } \left( \sigma _ { 1 } \right) ^ { 2 } - \mathrm { r } _ { 1.2 } \mathrm { E } \left( \sigma _ { 1 } \right) \mathrm { E } \left( \sigma _ { 2 } \right) \right] \div \left[ \mathrm { E } \left( \sigma _ { 1 } \right) ^ { 2 } + \mathrm { E } \left( \sigma _ { 2 } \right) ^ { 2 } - 2 r _ { 1.2 } \mathrm { E } \left( \sigma _ { 1 } \right) \mathrm { E } \left( \sigma _ { 2 } \right) \right]
-Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r₁.₂ = -1.


A) E(σ1) ¸ [E(σ1) + E(σ2) ]
B) E(σ1) ¸ [E(σ1) - E(σ2) ]
C) E(σ2) ¸ [E(σ1) + E(σ2) ]
D) E(σ2) ¸ [E(σ1) - E(σ2) ]
E) None of the above

Correct Answer:

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