The stock of Bruin, Inc., has an expected return of 25 percent and a standard de

Question

The stock of Bruin, Inc., has an expected return of 25 percent and a standard deviation of 38 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 43 percent. The correlation between the two stocks is .43. Calculate the expected return and standard deviation of the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

The stock of Bruin, Inc., has an expected return of 25 percent and a standard deviation of 38 percent. The stock of Wildcat Co. has an expected return of 12 percent and a standard deviation of 43 percent. The correlation between the two stocks is .43. Calculate the expected return and standard deviation of the minimum variance portfolio. (Do not round intermediate calculations. Enter your answers as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Explanation / Answer

Bruin Wildcat

Expected return 25% 12%   

Standard Deviation 38% 43%

Weight= (.43)*(.43)-(.43)*(.12)*(-.43) / (.43)*(.43)+(.12)*(.12)-2*(.43)*(.12)*(-.43)

=0.207088/0.243676

= 0.84984

Weight in the Wildcat=1-0.84984=0.15015

weight in the Bruin is 0.84984=84.98% and wildcat is 0.15015=15.015%

Expected return of the minimum variance portfolio =0.84984*.25+0.15015*.38=0.269517

Standard Deviation of the minimum variance portfolio =(0.15015)*(0.15015)*(.43)*(.43)+(0.84984)(0.84984)*(.12)(.12)+2(.15015)(.84984)(.43)(.12)(-.43)=0.93834

SD*SD=0.93834

SD=route0.93834

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