Possible variance of the combined portfolio

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Assume that markets are efficient, and that the CAPM holds. The expected market return is 12%, and the risk-free rate is 4%. Some data on a number of assets are given below: Correlation Stock XYZ Stock A Stock B Stock C Market Variance Stock XYZ 1.0 0.0 0.2 -0.2 0.6 0.2500 Stock A 1.0 0.4 -0.1 0.5 0.0900 Stock B 1.0 0.1 0.1 0.0400 Stock C 1.0 0.3 0.2025 Market 1.0 0.0256

You work for XYZ, which offers an "employee match" program to encourage employees to save for retirement. For every two dollars that you invest in your 401k, XYZ will contribute a third dollar. The caveat is that XYZ makes the contribution in shares of the company's stock, and you are not permitted to sell these shares. 1.

Suppose that you invest your contribution in just one of the five assets shown in the table. Then, XYZ matches your contribution in shares of its stock. What is the lowest possible variance of the combined portfolio?

Reference no: EM133113101

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