Use the following information to answer questions 8-9.
An investor is considering a portfolio consisting of 60% invested in Stock X and 40% invested in Stock Y. The expected returns for the stocks are 10% for Stock X and 8% for Stock Y. Variance of the stock returns are 0.04 for Stock X and 0.02 for Stock Y, and a covariance of -0.01 between the two stocks.
-What is the variance of the proposed portfolio?

Question

Quizplus · Accepted Answer

The variance of the portfolio can be calculated using the formula: $ \sigma_p^2 = w_x^2\sigma_x^2 + w_y^2\sigma_y^2 + 2w_xw_yCov(X,Y) $, where $ w_x $ and $ w_y $ are the weights of stocks X and Y in the portfolio, $ \sigma_x^2 $ and $ \sigma_y^2 $ are the variances of stocks X and Y, and $ Cov(X,Y) $ is the covariance between stocks X and Y. Plugging in the given values: $ \sigma_p^2 = (0.6)^2(0.04) + (0.4)^2(0.02) + 2(0.6)(0.4)(-0.01) = 0.0144 + 0.0032 - 0.0048 = 0.0128 $.

Use the Following Information to Answer Questions 8-9