A stock fund has a standard deviation of 18% and a bond fund has a standard deviation of 10%. The correlation of the two funds is .15. What is the approximate weight of the stock fund in the minimum variance portfolio?
A)11%
B)15%
C)20%
D)24%
E)27%

Question

Quizplus · Accepted Answer

The weight of the stock fund in the minimum variance portfolio can be calculated using the formula:
Weight of Stock Fund = (SD of Bond Fund)^2 / [(SD of Stock Fund)^2 + (SD of Bond Fund)^2 - 2*(Correlation)*(SD of Stock Fund)*(SD of Bond Fund)]
Plugging in the given values, we get:
Weight of Stock Fund = (10^2) / [(18^2) + (10^2) - 2*(0.15)*(18)*(10)]
Weight of Stock Fund = 0.2005 or 20.05%
Therefore, the approximate weight of the stock fund in the minimum variance portfolio is 20%, which is closest to option C (20%).

A Stock Fund Has a Standard Deviation of 18% and a Bond