Suppose that E(X) = 1, E(Y )=1.5, Var(X) = 2, Var(Y )=2.7, and Cov(X, Y )=0.8.
(a) What are E(0.2X + 0.8Y ) and Var(0.2X + 0.8Y )?
(b) For what value of w is Var{wX + (1−w)Y } minimized? Suppose that X is the return on one asset and Y is the return on a second asset. Why would it be useful to minimize Var{wX + (1 − w)Y }?
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