What is the minimum risk portfolio of at&t


Task: Suppose that you have the opportunity to buy stock in AT&T and Miscrsoft. 

 

 

AT&T

Microsoft

Mean

.10

.21

Standard Deviation

.15

.25


Q1. What is the minimum risk (variance) portfolio of AT&T and Microsoft in 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 a?

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?

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