Suppose Stock A has an expected return of 15%, a standard deviation of 20%, and a Beta of 0.4 while Stock B has an expected return of 25%, a standard deviation of 30% and a beta of 1.25, and the correlation between the two stocks is 0.25. What is the percent invested in Stock A to yield the minimum standard deviation portfolio containing Stock A and Stock B?
A) 25%
B) 50%
C) 75%
D) 90%

Question

Quizplus · Accepted Answer

The minimum standard deviation portfolio is achieved when the weights of the two stocks are inversely proportional to their standard deviations. In this case, the standard deviation of Stock A is 20% and the standard deviation of Stock B is 30%. Therefore, the weight of Stock A in the portfolio should be 20/(20+30) = 40% and the weight of Stock B in the portfolio should be 30/(20+30) = 60%.

Suppose Stock a Has an Expected Return of 15%, a Standard