A portfolio has 50% of its funds invested in Security One and 50% of its funds invested in Security Two.Security One has a standard deviation of 8%.Security Two has a standard deviation of 10%.The securities have a coefficient of correlation of .5.Which of the following values is closest to portfolio variance?
A).0025
B).0061
C).0095
D).0102
E)One must have covariance to calculate expected value.

Question

Quizplus · Accepted Answer

The portfolio variance is calculated using the formula: Var(P) = w1^2 * Var(S1) + w2^2 * Var(S2) + 2 * w1 * w2 * Cov(S1, S2). Given the weights (w1 = w2 = 0.5), variances (Var(S1) = 0.08^2, Var(S2) = 0.10^2), and correlation (0.5), the covariance is 0.5 * 0.08 * 0.10. Plugging these into the formula gives a portfolio variance closest to 0.0061.

A Portfolio Has 50% of Its Funds Invested in Security