Problem: Suppose that you have the opportunity to buy stock in AT&T and Miscrsoft.
|
|
AT&T
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Microsoft
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|
Mean
|
.10
|
.21
|
|
Standard Deviation
|
.15
|
.25
|
Q1. What is the minimum risk (variance) portfolio of AT&T and Microsoft ifn the correlation between the two stocks is 0? .5? 1? -1? What do you notice about the change in the allocations between AT&T and Microsoft as their correlation moves from -1 to 0 to .5 to +1? Why might this be?
Q2. What is the variance of each of the minimum-variance portfolios in part (1)?
Q3. What is the optimal combination of these two securities in a portfolio for each value of correlation, assuming the existence of a money market fund that currently weights for the minimum-variance portfolios?
Q4. What is the variance of each of the optimal portfolios?
Q5. What is the expected return of each of the optimal portfolios?
Q6. Derive the risk-reward trade-off line for the o[optimal portfolio when the correlation is .5. How much extra expected return can you anticipate if you take on a extra unit risk?