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Thread: Global Minium Variance

  1. #1
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    Global Minium Variance

    On one of my exam past papers A question reads

    The parameters of the opportunity set are E(rD)=8%, E(rE)=13%, s.d=12%, s.d=20% and p(D,E)=0.25. (i)Calculate global minimum variance if the portfolio consists of D and E. and (ii) calculate the expected return when the variance is at the global minimum.

    I have no idea what I am supposed to do here can anyone offer me some advice on how to go about the question?


    The solution I am given is....

    wd=0.8019, we=0.1981 s.d(p)=0.1981 E(rp)=11.29%
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  2. #2
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    Re: Global Minium Variance

    Quote Originally Posted by NixLUKE View Post
    On one of my exam past papers A question reads

    The parameters of the opportunity set are E(rD)=8%, E(rE)=13%, s.d=12%, s.d=20% and p(D,E)=0.25. (i)Calculate global minimum variance if the portfolio consists of D and E. and (ii) calculate the expected return when the variance is at the global minimum.

    I have no idea what I am supposed to do here can anyone offer me some advice on how to go about the question?

    The solution I am given is....

    wd=0.8019, we=0.1981 s.d(p)=0.1981 E(rp)=11.29%
    Try these:

    w_D = \dfrac{\sigma^2_E - Cov(r_D, r_E)}{\sigma^2_D + \sigma^2_E - 2Cov(r_D, r_E)}

    w_E = 1 - w_D

    Note that \rho_{XY}=\dfrac{Cov(X, Y)}{\sigma_X \sigma_Y}.
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