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Determine the minimum-variance portfolio

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Reference no: EM133253198

The monthly average return and standard deviation of Amazon (AMZN) stock returns are 3% and 8%, respectively. The monthly average return and standard deviation of Johnson & Johnson (JNJ) stock returns are 1% and 5%, respectively. The correlation between AMZN and JNJ is 0.3. Currently, the monthly risk-free rate is 0.2%.

Note: You can use the formula or the Excel template in Unit 5.

  1.  Determine the minimum-variance portfolio.
    • You do not need to show your calculation steps for this subquestion.
  2.  Determine the optimal risky portfolio P*.
    • You do not need to show your calculation steps for this subquestion.
  3. Suppose that you decide to invest 100% of your budget in P*. What is the Sharpe ratio for your portfolio?
    • Show your calculation steps briefly and clearly.
  4. One of your friends is pursuing an aggressive strategy and decide to invest 130% in P* and -30% in the risk-free asset (i.e., borrowing at the risk-free rate). Your friend believes that her portfolio provides a superior risk and return trade-off than your portfolio (100% in P*). Briefly explain why your friend's argument is not correct.

Reference no: EM133253198

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