Chapter 6 – Appendix B
Exhibit 6B.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(1)2 − r1.2 E(1) E(2)] [E(1)2 + E(2)2 − 2 r1.2 E(1) E(2)]
1. Refer to Exhibit 6B.1. Show the minimum portfolio variance for a portfolio of two risky assets when r1.2 = −1.
a.
E(1) [E(1) + E(2)]
b.
E(1) [E(1) − E(2)]
c.
E(2) [E(1) + E(2)]
d.
E(2) [E(1) − E(2)]
e.
None of these are correct.
2. Refer to Exhibit 6B.1. What is the value of W1 when r1.2 = −1 and E(1) = .10 and E(2) = .12?
a.
b.
c.
d.
e.