Question

An investor can design a risky portfolio based on two stocks, A and B. The standard deviation of return on stock A is 20% while the standard deviation on stock B is 5%. The correlation coefficient between the return on A and B is 0%. The standard deviation of return on the minimum variance portfolio is __________.

A.       0%

B.       4.15%

C.       4.85%

D.       5.00%

Answer 1

C is correct.

For MVP, invest 5% in Stock A and 95% in Stock B to get a standard deviation of 4.85%

SD = [(5% x 20%)^2 + (95% x 5%)^2]^(1/2) = 4.85%