The variance of a portfolio of risky securities
A)is a weighted sum of the securities' variances.
B)is the sum of the securities' variances.
C)is the weighted sum of the securities' variances and covariances.
D)is the sum of the securities' covariances.
E)none of the above.

Question

Quizplus · Accepted Answer

The variance of a portfolio of risky securities depends not only on the variances of the individual securities but also on their covariances. The covariance measures how the returns of two securities move together. As a result, the variance of a portfolio is a weighted sum of the securities' variances and covariances. This is known as the portfolio variance formula.

The Variance of a Portfolio of Risky Securities