Use the table for the question(s)below.
Consider the following covariances between securities:
-The variance on a portfolio that is made up of a $6000 investment in Duke Energy and a $4000 investment in Walmart stock is closest to:
A).050.
B).045.
C).051.
D)-0.020.

Question

Use the table for the question(s)below.
Consider the following covariances between securities: 
-The variance on a portfolio that is made up of a $6000 investment in Duke Energy and a $4000 investment in Walmart stock is closest to:
A).050. 
B).045. 
C).051. 
D)-0.020.

Quizplus · Accepted Answer

The variance of a portfolio made up of two securities can be calculated as follows:

Variance of Portfolio = w1^2 * Variance of Stock 1 + w2^2 * Variance of Stock 2 + 2 * w1 * w2 * Covariance between Stock 1 and Stock 2

where w1 and w2 are the weights of the two stocks in the portfolio (in this case, 0.6 and 0.4, respectively).

Plugging in the values from the table, we get:

Variance of Portfolio = (0.6)^2 * 0.048 + (0.4)^2 * 0.052 + 2 * 0.6 * 0.4 * 0.006 = 0.0468

Therefore, the closest answer is B).045.

Use the Table for the Question(s)below