Answer to Question #279799 in Economics of Enterprise for Shan

Question

. Layla desires to form an investment portfolio by using the following stocks. The four stocks’ returns, and variance-covariance matrix are given as follows.

Stock

Return %

Stock

Return %

 

Var-Cov

X

Y

Z

V

X

8

 

X

25

20

-13.5

30

Y

10

 

Y

20

64

7.2

24

Z

15

 

Z

-13.5

7.2

81

-18

V

18

 

V

30

24

-18

100

 

Assume short selling is allowed.

a) Calculate the expected return and standard deviation of an equally weighted portfolio of the four stocks.

b) What weight combinations will give the minimum standard deviation portfolio? What are the expected return and standard deviation of that portfolio?

c) If Layla desires 16% rate of return, what weight combinations give that? What is the minimum standard deviation of that portfolio?  

Answer 1

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