Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is?

Question

Eliza Hinton

Business

19 March, 11:51

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 16% and a standard deviation of return of 20%. B has an expected rate of return of 10% and a standard deviation of return of 30%. The weight of security B in the minimum-variance portfolio is?

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Trigger · Answer 1

40%

Explanation:

Here, We have two perfectly negatively correlated risky securities.

So, the minimum variance portfolio will be the portfolio with zero variance.

so, x (A) = σ (B) / (σA) + σ (B)) and x (B) = σ (A) / (σ (A) + σ (B))

therefore, x (B) = 20 / (20+30)

x (B) = 20/50

x (B) = 2/5 = 40%