Question

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

Hello Sir/ Mam

Given that:

W_a = 30%

W_b = 70%

SD_a = 7%

SD_b= 5%

Correlation = -0.5

Now, we know that,

Portfolio Variance Formula = w12* d12 + w22 * d22 2 * P1,2 * W1*w2 * di * d2

Wi Portfolio weight of asset i d2Individual variance of asset i Pi Correlation between asset i and assetj

Hence, using the above formula,

we get

Portfolio Variance = 0.0931%

I hope this solves your doubt.

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