Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of Security B in the minimum variance portfolio is ________.
A)10%
B)20%
C)40%
D)60%

Question

Quizplus · Accepted Answer

The minimum variance portfolio is achieved when the weights of the securities are inversely proportional to their variances. In this case, the variance of Security A is 20^2 = 400 and the variance of Security B is 30^2 = 900. Therefore, the weight of Security B in the minimum variance portfolio is 400 / (400 + 900) = 40%.

Consider Two Perfectly Negatively Correlated Risky Securities, a and B