You have $10,000 invested in a portfolio A. If you sell 70% and invest in an asset B whose return has a correlation of...

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You have $10,000 invested in a portfolio A. If you sell 70% and invest in an asset B whose return has a correlation of...

You have $10,000 invested in a portfolio A. If you sell 70% and invest in an asset B whose return has a correlation of -0.5 with the return on portfolio. What is your overall portfolio variance then? Assume that the standard deviation of A is 7%, and that for B is 5%

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Answer 1

Answer #1

Please refer to below spreadsheet for calculation and answer. Cell reference also provided.

A В C E 1 Weight Standard deviation Portfolio A 2 30% 7% Asset B Correlation 70% 5% 4 0.5 0.0931% Variance of Portfolio (AB)

Cell reference -

A В C D 1 Weight Standard deviation Portfolio A 2. 0.3 0.07 Asset B 0.7 0.05 3 -0.5 4 Correlation 5 (C2*D2)^2+(C3*D3)^2+2*C2*

Hope this will help, please do comment if you need any further explanation. Your feedback would be highly appreciated.

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Answer 2

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