An investor can design a risky portfolio based on two stocks,A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 15%. The expected return on stock A is 20% while on stock B it is 10%. The correlation coefficient between the return on A and B is 0%. The expected return on the minimum variance portfolio is approximately _________.
A) 10.00%
B) 13.60%
C) 15.00%
D) 19.41%

Question

Quizplus · Accepted Answer

The minimum variance portfolio is calculated using the formula for weights: w_A = (σ_B^2) / (σ_A^2 + σ_B^2), w_B = 1 - w_A. With σ_A = 20% and σ_B = 15%, w_A = (0.15^2) / (0.20^2 + 0.15^2) = 0.36, and w_B = 0.64. The expected return is then: E(R) = w_A * E(R_A) + w_B * E(R_B) = 0.36 * 20% + 0.64 * 10% = 13.6%.

An Investor Can Design a Risky Portfolio Based on Two