Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:

-The volatility of a portfolio that is consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Question

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
 
-The volatility of a portfolio that is consists of a long position of $10,000 in Wal-Mart and a short position of $2000 in Microsoft is closest to:

Quizplus · Accepted Answer

The volatility of the portfolio can be calculated using the formula:
σP=√w1^2σ1^2+w2^2σ2^2+2w1w2ρ12σ1σ2
where,
w1=10,000/(10,000-2,000)=1.25 (since it is a short position for Microsoft, the weight for Microsoft is negative)
w2=-2,000/(10,000-2,000)=-0.25
σ1=16%
σ2=20%
ρ12=0.6
Substituting the values, we get:
σP=√(1.25^2)(16%^2)+(-0.25^2)(20%^2)+2(1.25)(-0.25)(0.6)(16%)(20%)
σP=√(2.28%)
σP=14.4%
Therefore, the closest option is B) 14%.

Use the Table for the Question(s)below