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CMA Final · Strategic Financial Management · Portfolio Theory and Practice

Two-asset portfolio: Asset 1 has SD 12%, Asset 2 has SD 20%, and their correlation is -1. What weight in Asset 1 gives a zero-risk portfolio?

The weight in Asset 1 should be 62.5%. With perfect negative correlation, zero risk requires weights inversely proportional to standard deviations, so w1 = 20/(12+20) = 62.5%. The 37.5% figure is the weight in Asset 2.

  1. A37.5%
  2. B62.5%Correct
  3. C50.0%
  4. D60.0%

Explanation

With correlation -1, the zero-variance weight in Asset 1 = SD2/(SD1+SD2) = 20/32 = 62.5%. Check: 0.625x12 = 7.5 and 0.375x20 = 7.5, so the risks cancel. The 37.5% option is the weight of Asset 2, not Asset 1.

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