Consider a portfolio of two risky assets A1 and A2 with respective weights w1 and w2 

Consider a portfolio of two risky assets A1 and A2 with respective weights w1 and w2 . The assets’ mean returns and standard deviations of returns are denoted μj and σj, j=1, 2 ; let the correlation between the returns be ρ .

1. Derive the risk-minimizing allocation between A1 and A2 , as well as the resulting portfolio’s mean return and standard deviation of returns if

μ1=0.01, σ1=0.10, μ2=0.02, σ2=0.15, ρ=0.3

2. If asset A1 is a risk-free asset, show that the risk-minimizing allocation should be to invest on A1 only.