We must invest all our money in two stocks: x and y.The variance of the annual return on one share of stock x isvar x, and the variance of the annual return on one share ofstock y is var y. Assume that the covariance between theannual return for one share of x and one share of y is cov(x,y). If we invest a% of our money in stock x and b% in stocky, then the variance of our return is given by a2var xb2var y2ab cov(x, y). We want to minimize the variance of thereturn on our invested money. What percentage of the moneyshould be invested in each stock?
We must invest all our money in two stocks: x and y.The variance of the annual return on one share of stock x isvar x, and the variance of the annual return on one share ofstock y is var y. Assume that the covariance between theannual return for one share of x and one share of y is cov(x,y). If we invest a% of our money in stock x and b% in stocky, then the variance of our return is given by a2var xb2var y2ab cov(x, y). We want to minimize the variance of thereturn on our invested money. What percentage of the moneyshould be invested in each stock?
Practical Management Science
6th Edition
ISBN:9781337406659
Author:WINSTON, Wayne L.
Publisher:WINSTON, Wayne L.
Chapter2: Introduction To Spreadsheet Modeling
Section: Chapter Questions
Problem 20P: Julie James is opening a lemonade stand. She believes the fixed cost per week of running the stand...
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Question
We must invest all our money in two stocks: x and y.
The variance of the annual return on one share of stock x is
var x, and the variance of the annual return on one share of
stock y is var y. Assume that the covariance between the
annual return for one share of x and one share of y is cov(x,
y). If we invest a% of our money in stock x and b% in stock
y, then the variance of our return is given by a2
var x
b2
var
The variance of the annual return on one share of stock x is
var x, and the variance of the annual return on one share of
stock y is var y. Assume that the covariance between the
annual return for one share of x and one share of y is cov(x,
y). If we invest a% of our money in stock x and b% in stock
y, then the variance of our return is given by a2
var x
b2
var
y
2ab cov(x, y). We want to minimize the variance of the
return on our invested money. What percentage of the money
should be invested in each stock?
2ab cov(x, y). We want to minimize the variance of the
should be invested in each stock?
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