What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T?
A).000017
B).000023
C).000118
D).000136
E).000161

Question

What is the variance of the returns on a portfolio that is invested 60 percent in stock S and 40 percent in stock T? 
A).000017 
B).000023 
C).000118 
D).000136 
E).000161

Quizplus · Accepted Answer

E(r)_Boom = (0.60 F1F1F1S1F1F1F10 0.17) + (0.40 F1F1F1S1F1F1F10 0.07) = 0.13E(r)_Normal = (0.60 F1F1F1S1F1F1F10 0.13) + (0.40 F1F1F1S1F1F1F10 0.10) = 0.118E(r)_Portfolio = (0.20 F1F1F1S1F1F1F10 0.13) + (0.80 F1F1F1S1F1F1F10 0.118) = 0.1204Var_Portfolio = 0.20 (0.13 - 0.1204)²] + 0.80 (0.118 - 0.1204)² = .000023

What Is the Variance of the Returns on a Portfolio