A stock fund has a standard deviation of 28% and a bond fund has a standard deviation of 16%. 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)21%
D)24%
E)27%

Question

Quizplus · Accepted Answer

The formula for minimum variance portfolio weight of Stock is:

w_stock = (σ_bond^2 - ρσ_stockσ_bond) / (σ_stock^2 + σ_bond^2 - 2ρσ_stockσ_bond)

Substituting the given values, we get:

w_stock = (16^2 - 0.15 x 28 x 16) / (28^2 + 16^2 - 2 x 0.15 x 28 x 16) = 0.21 or 21%

Therefore, the approximate weight of the stock fund in the minimum variance portfolio is 21%.

A Stock Fund Has a Standard Deviation of 28% and a Bond