Statistics – Statistics are central to managing an investment portfolio

Statistics – Statistics are central to managing an investment portfolio

Statistics – Statistics are central to managing an investment portfolio Statistics are central to managing an investment portfolio. Imagine an investor is choosing how to divide each dollar between two investments, labelled 1 and 2. Investment 1 has a return with mean 1 and standard deviation 0.5, investment 2 has a return with mean 3 and standard deviation 2, and the correlation between the two returns is 0.6. The portfolio invests a fraction ω in investment 1 and a fraction 1 − ω in investment 2.(a) Find formulas for the mean of the portfolio return, labelled µp, and the variance,labelled σ2p, as functions of ω.(b) The investor would like a high return on average but also would like low variability (a measure of risk). Suppose the investor seeks the highest value ofµp − σ2p.Find the value of ω that meets this objective.

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