Stocks A, B, and C have expected returns of 7%, 6%, and 10%,
respectively and the following variance-covariance matrix:- A B C A
0.1 B 0.001 0.04 C 0.001 -0.04 0.08
(a) Determine the fraction of portfolio to hold in each stock so
as to minimize the variance of the portfolio subject to a minimum
expected return of the portfolio of 8%. (10 points)
(b) Can the variance of the portfolio be smaller than the
variance of any individual stock? Explain. (10 points)
(c) Find the optimal portfolio if the minimum expected returns
for 7% and 9%. Also, plot a curve to show the relationship between
expected return and variance (15 points).
