Question

21.45% 22.10% 21355 2255% Question 13 Standard deviation of the returns for Stock Als 0.85. Whereas returns for Stock Bhave a standard deviation of 0.55. The covariance between the stocks returns is 0.30. The variance of a portfolio composed of 40% of Stock A and box of Stock Bis 0.3464 0.3796 03685 03538 0359 Question 14

Answer 1

	Stock A	Stock B
Standard Deviation	0.85	0.55
Variance (SD square)	0.72	0.30
Weights	40%	60%
Co - Variance	0.3

.

1 st we will convert Co variance to co- relation

Co variance of A B / (SD of Stock A * SD of Stock B)

0.3/ (0.85*0.55) = 0.641711

The lower the portfolio variance the better diversified the portfolio is considered.

It is a measure of risk of the portfolio, if the portfolio has assets with negative or low correlation the variance of the portfolio will be lower.

Formula to calculate variance of portfolio

W Stock A^2 * VarianceA + W Stock B^2 * Variance B + 2*WA*WB*SD1 * SD2 * Co-relation

0.42* 0.7225 + 0.62 *0.3025 + 2*0.6*0.85*0.4*0.55*0.641711

Protfolio Variance = 0.3685.