1. ## 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%

2. ## Re: Global Minium Variance

Originally Posted by NixLUKE
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:

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

$\displaystyle w_E = 1 - w_D$

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