Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. a
ID: 2383345 • Letter: A
Question
Andrea Corbridge is considering forming a portfolio consisting of Kalama Corp. and Adelphia Technologies. The two corporations have a correlation of -0.1789, and their expected returns and standard deviations are as follows:
Kalama Corp.
Adelphia Technologies
Expected return (%)
14.86
23.11
Standard Deviation (%)
23.36
31.89
Calculate the frontier for all possible investment combinations of Kalama Corp. and Adelphia Technologies (from 0% to 100%, in 1% increments). Determine the optimal risky portfolio if the risk-free rate is 3%.
Kalama Corp.
Adelphia Technologies
Expected return (%)
14.86
23.11
Standard Deviation (%)
23.36
31.89
Explanation / Answer
Solution :
From correlation & standard deviation ,we can compute the following
Kalama Corp.
Adelphia Technologies
Kalama Corp. 545.69 - 133.27
Adelphia Technologies - 133.27 1016.97
where covariance = correlaton * standard deviation a *standard deviationb
Minimum variance portfolio will be calculated as below
Kalama Corp. = [(31.89)2 + 133.27] / [(31.89)2 +(23.36)2- (2*-133.27)]
= [1016.97 +133.27] / [ 1016.97+545.69 + 266.54 ]
= 1150.24 / 1829.2
= 0.6288
Adelphia Technologies = 1- 0.6288 = 0.3712
Minimum variance portfolio mean & variance
Minimum variance portfolio mean =(14.86% *0.6288) +(23.11%*0.3712)
= 9.34 + 8.58 = 17.92%
Minimum variance portfolio variance = [(0.6288*545.69) + (0.3712*1016.97) + (2*0.6288*0.3712 *- 133.27)]1/2
= [343.13 +377.5 - 62.21]1/2
= 25.66
Kalama Corp.
Adelphia Technologies