The Perfect Hedge I - QuantGuide

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The Perfect Hedge I

Medium

Finance

You have two assets. We will call them asset

1

and asset

2

. Asset

1

has an expected return of

4\%

and a variance of

15\%

. Asset

2

has an expected return of

2\%

and a variance of

4\%

. They have a correlation

\rho = -1

\\

We want to create a risk-free portfolio using assets

1

and

2

. We will denote

w_1

and

w_2

as the weights of asset

1

and

2

in the portfolio respectively. Assume that

w_1 + w_2 = 1

. What is

w_1

? Give the answer to

2

decimal points.

Notes

Hint

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The Perfect Hedge I

Medium

Finance

You have two assets. We will call them asset

1

and asset

2

. Asset

1

has an expected return of

4\%

and a variance of

15\%

. Asset

2

has an expected return of

2\%

and a variance of

4\%

. They have a correlation

\rho = -1

\\

We want to create a risk-free portfolio using assets

1

and

2

. We will denote

w_1

and

w_2

as the weights of asset

1

and

2

in the portfolio respectively. Assume that

w_1 + w_2 = 1

. What is

w_1

? Give the answer to

2

decimal points.

Notes

Hint