Question:

The portfolio of an investment firm comprises of two risky assets, 𝑆 and 𝑇, whose returns are denoted by random variables 𝑅𝑠 and 𝑅𝑇 respectively. The mean, the variance and the covariance of the returns are
𝐸(𝑅𝑠 ) = 0.08, π‘‰π‘Žπ‘Ÿ(𝑅𝑠 ) = 0.07, 
𝐸(𝑅𝑇 ) = 0.05, π‘‰π‘Žπ‘Ÿ(𝑅𝑇 ) = 0.05, πΆπ‘œπ‘£(𝑅𝑠 , 𝑅𝑇 ) = 0.04. 
Let 𝑀 be the proportion of assets allotted to 𝑆 so that the return from the portfolio is 𝑅 = 𝑀𝑅𝑠 + (1 βˆ’ 𝑀)𝑅𝑇 . The value of 𝑀 which minimizes π‘‰π‘Žπ‘Ÿ(𝑅) is _____(round off to 2 decimal places)

Updated On: Oct 1, 2024
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Correct Answer: 0.24

Solution and Explanation

The correct answer is: 0.24 or 0.26 (approx.)
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