Answered

At Westonci.ca, we connect you with the answers you need, thanks to our active and informed community. Get expert answers to your questions quickly and accurately from our dedicated community of professionals. Get immediate and reliable solutions to your questions from a community of experienced professionals on our platform.

Consider two perfectly negatively correlated risky securities, A and B. Security A has an expected rate of return of 12% and a standard deviation of return of 17%. B has an expected rate of return of 9% and a standard deviation of return of 14%.

Required:
a. What are the weights of A and B in the global minimum variance portfolio respectively?
b. What is the rate of return on the risk-free portfolio that can be formed with the two securities ?

Sagot :

Answer:

A) Weight of Security A = 0.45

Weight of Security B = 0.55

B)Risk free rate = 10.35%

Explanation:

We are given;

A) Expected rate of return for Security A; ERR = 12%

Standard deviation of return for Security A; SD = 17%

Expected rate of return for Security B; ERR = 9%

Standard deviation of return for Security B; SD = 14%

Now, formula for weight of Security A is;

Weight of security A = SD of security B ÷ (SD of security B + SD of security A)

Weight of Security A = 14%/(14% + 17%)

Weight of Security A ≈ 0.45

Weight of Security B = 1 - weight of Security A

Weight of Security B = 1 - 0.45

Weight of Security B = 0.55

B) Formula for the risk free rate is;

Risk free rate = (weight of Security A × ERR of security A) + (weight of Security B × ERR of security B)

Risk free rate = (0.45 × 12%) + (0.55 × 9%)

Risk free rate = 10.35%

Your visit means a lot to us. Don't hesitate to return for more reliable answers to any questions you may have. We hope our answers were useful. Return anytime for more information and answers to any other questions you have. We're glad you visited Westonci.ca. Return anytime for updated answers from our knowledgeable team.