Minimum variance and efficient set 31
A better method for diversification
Find out the portfolio weights that
minimize the portfolio variance
for a given expected portfolio return
For any two assets, plotting return
and standard deviation for all
feasible portfolio weights yields the
combination line
for these
assets
Assume the following expected returns and standard deviations for two
uncorrelated
securities:
Single-period random cash flows: Mean-variance portfolio theory
2
2
2
2
(^10) ,
0
)
(^1) (
(^05) ,
0
)
(
A
A
P
x
x
r
−
- =
σ
(^04) ,
(^0) )
(^1) (
(^10) ,
0
]
[
A
A
P
x
x
r
E
−
=
AB
E(r)
0.10
0.04
SD(r)
0.05
0.10
Security