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Exercise 1. You are given a two security portfolio: Expected Return Standard Deviation ...

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Accounting

Exercise 1.

You are given a two security portfolio:

Expected Return Standard Deviation

MCD .16 .19

BA .11 .15

Correlation between MCD and BA is -.20

a.Solve for the portfolio weights which minimizes the portfolio standard deviation. What is the minimum standard deviation and what is the expected return?

b.Change the correlation to .20 and then to -.40. What happens to the optimal weights, the standard deviation, and the expected return?

c.Increase the return on MCD to 19% and its standard deviation to 25% assuming a correlation of -.20. What happens to the optimal weights, the standard deviation and the expected return?

d.Consider the original problem and you have a target rate of return of for the portfolio of 12%. Solve for the portfolio weights which minimize the portfolio standard deviation and achieve the target return. What is the minimum standard deviation?

e.Now change the correlation to 0.6 and you have a target rate of return of for the portfolio of 14%. Solve for the portfolio weights which minimize the portfolio standard deviation and achieve the target return. What is the minimum standard deviation?

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