In the case of a portfolio of N-stocks, the formula for portfolio variance contains:
A) N covariance terms
B) N(N - 1)/2 covariance terms
C) N2 covariance terms
D) None of the above

Question

Quizplus · Accepted Answer

The formula for portfolio variance involves the sum of the covariance terms between each pair of stocks in the portfolio. Since there are N stocks, there are N(N-1)/2 unique pairs of stocks and therefore N(N-1)/2 covariance terms.

In the Case of a Portfolio of N-Stocks, the Formula