Exhibit 7B -Refer to Exhibit 7B

question 2

Multiple Choice

Exhibit 7B.l
USE THE INFORMATION BELOW FOR THE FOLLOWING PROBLEM(S)
The general equation for the weight of the first security to achieve the minimum variance (in a two stock portfolio) is given by:
$$\mathrm { W } _ { 1 } = \left[ \mathrm { E } \left( \sigma _ { 1 } \right) ^ { 2 } - \mathrm { r } _ { 1.2 } \mathrm { E } \left( \sigma _ { 1 } \right) \mathrm { E } \left( \sigma _ { 2 } \right) \right] \div \left[ \mathrm { E } \left( \sigma _ { 1 } \right) ^ { 2 } + \mathrm { E } \left( \sigma _ { 2 } \right) ^ { 2 } - 2 r _ { 1.2 } \mathrm { E } \left( \sigma _ { 1 } \right) \mathrm { E } \left( \sigma _ { 2 } \right) \right]$$
-Refer to Exhibit 7B.1.Show the minimum portfolio variance for a portfolio of two risky assets when r₁.₂ = -1.

• A) E(σ1) ¸ [E(σ1) + E(σ2)]
• B) E(σ1) ¸ [E(σ1) - E(σ2)]
• C) E(σ2) ¸ [E(σ1) + E(σ2)]
• D) E(σ2) ¸ [E(σ1) - E(σ2)]
• E) None of the above

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Definitions:

Standard Deviation

An assessment of the range of variation or dispersion present in a set of numeric values, demonstrating how spread out the values are in relation to the average.

Mean

The arithmetic average of a set of values, calculated by summing all the values and then dividing by the total number of values.

DVD Rental Store

A business establishment that offers DVDs for rent to the public, typically involving a physical location where customers can browse and select from available titles.

Standard Error

A statistical measure that quantifies the variability or uncertainty in the sampling distribution of a statistic, often used in estimating margins of error.