I am considering investment in security A and B (Portfolio Management). Pl help me to decide what proportion?
Question:
(a) If the correlation between A and B is 0.60, what is the least risky combination of these two assets?
(b) If the investor decides to invest in a risk free security that is offering annual return of 5%, what would be the least risk combination of these two assets and the risk free security to give 12% return?
Answer:
Argh. Sounds like a test question from one of my finance classes.
I would have to look it up in one of my books, but let's see if my intuition and vague recollection can work up a good guess before I actually research the answer.
(a) The answer is likely weighted, but not too strongly for B, i.e. the majority for stock B with some 1/3 or so in A.
(b) My gut says that roughly a roughly even split between the three, but slightly weighted for security A. (say about 37% A, 33% B, 31% risk-free)
Answer to A is -.1 A and 1.1 B. I will let you do the calculus behind this, it is not hard. B should be simple once you have A.
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