A portfolio has 35% of its funds invested in Security One and 65% of its funds invested in Security Two. Security One has a standard deviation of 6. Security Two has a standard deviation of 12. The securities have a coefficient of correlation of.5. Which of the following values is closest to portfolio variance?
A) 81.
B) 90.
C) 27.
D) 6561.

Question

Quizplus · Accepted Answer

The correct answer is A because the portfolio variance is closest to 81. The portfolio variance is calculated as the sum of the variances of the individual securities, plus the covariance between the securities. The covariance is calculated as the product of the standard deviations of the individual securities, multiplied by the correlation coefficient. In this case, the portfolio variance is calculated as (0.35 * 6^2) + (0.65 * 12^2) + (2 * 0.35 * 0.65 * 6 * 12 * 0.5) = 81.

A Portfolio Has 35% of Its Funds Invested in Security