Question

C What value of w makes the mean of R as large as possible? What is the SD of R for this value of w?

D. What us the value of w that minimizes the SD of R?

Answer 1

$1 in a stock yeilds Rs, $1 in a bond yeilds Rb

Rs is random with a mean .08 and SD of .07

Rb is random with a mean .05 and SD of .04

Correlation of Rs and Rb is .25

If you place a fraction w of your money in the stock fund and the rest, 1-w, in the bond fund, then your return on you investment is

R=wRs+(1-w)Rb