Explore BrainMass
Share

Explore BrainMass

    stocks in securities markets

    This content was COPIED from BrainMass.com - View the original, and get the already-completed solution here!

    Suppose that there are many stocks in securities markets and you locate two of them which have the following characteristics:

    Stock Expected Return Standard Deviation
    A 3% 6%
    B 8% 10%

    Correlation of the two returns = -1

    a. If you wanted to invest in Stocks A and B in such a way as to minimize risk, what weights should you put on the two stocks?
    b. What would the portfolio expected return and standard deviation be for the minimum risk portfolio?
    c. If there were a market for risk-free assets (like T-bills), what rate of interest would you expect such assets to offer?

    © BrainMass Inc. brainmass.com October 9, 2019, 7:41 pm ad1c9bdddf
    https://brainmass.com/economics/risk-analysis/stocks-securities-markets-126123

    Attachments

    Solution Preview

    Please see the attached file.

    1. Suppose that there are many stocks in securities markets and you locate two of them which have the following characteristics:

    Stock Expected Return Standard Deviation
    A 3% 6%
    B 8% 10%

    Correlation of the two returns = -1

    a. If you wanted to invest in Stocks A and B in such a way as to minimize risk, what weights should you put on the two stocks?

    The varaince of the portfolio is:
    Var = (Wa*Sa)2 + (Wb*Sb)2 + 2ρAB Wa*Wb*Sa*Sb
    Where:
    S is the standard ...

    Solution Summary

    Locate stocks in securities markets in this case.

    $2.19