Suppose you own a two-security portfolio.You have 25 percent of your funds invested in Security A and the balance of your funds invested in Security B.Security A has a standard deviation of 8 percent and Security B has a standard deviation of 12 percent.What is the covariance of the returns on Securities A and B if the portfolio standard deviation is 10 percent?
A) 0.0040
B) 0.0093
C) 0.0147
D) 0.0258

Question

Quizplus · Accepted Answer

COV_AB = [σ²-(w²_A)(σ²_A)- (w²_B)(σ²_B)]/[2((w_A)(w_B)] = (0.01-0.0004-0.0081)/0.375 = 0.004

Suppose You Own a Two-Security Portfolio