Chapter 6 – Appendix A
Exhibit 6A.1
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The general equation for the weight of the first security to achieve the minimum variance (in a two-stock portfolio) is
given by:
W1 = [E(2)2 − r1.2 E(1)E(2)] [E(1)2 + E(2)2 − 2 r1.2E(1)E(2)]
1. Refer to Exhibit 6A.1. What weight of security 1 gives the minimum portfolio variance when r1.2 = .60, E(1) = .10 and
E(2) = .16?
a.
.0244
b.
.3679
c.
.5697
d.
.6309
e.
.9756
2. Refer to Exhibit 6A.1. Show the minimum portfolio variance for a two-stock portfolio when r1.2 = 1.
a.
E(2) [E(1) − E(2)]
b.
E(2) [E(1) + E(2)]
c.
E(1) [E(1) − E(2)]
d.
E(1) [E(1) + E(2)]
e.
None of these are correct.