Homework Answers
Cov(B,S) = Correlation * S.D.(1) * S.D.(2)
= 0.32 * 28% * 15% = 134.4
For minimum variance portfolio,
W(1) = [Var(2) - Cov(1,2)] / [Var(1) + Var(2) - 2Cov(1,2)]
= [(15)2 - 134.4] / [(28)2 + (15)2 - 2(134.4)]
= [225 - 134.4] / [784 + 225 - 268.8] = 90.6 / 740.2 = 0.1224
W(B) = 1 - W(S) = 1 - 0.1224 = 0.877600648
Standard Deviation = [{w(1)2 * s.d.(1)2} + {w(2)2 * s.d.(2)2} + {2 * w(1) * w(2) * Covariance(1,2)}]1/2
= [{(0.1224)2 * (28)2} + {(0.8776)2 * (15)2} + {2 * 0.1224 * 0.8776 * 134.4}]1/2
= [11.75 + 173.29 + 28.87]1/2
= [213.91]1/2 = 14.63%
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