An investor has two stocks, Stock A and Stock B in her portfolio. What is the variance of theportfolio given the following information about the two stocks?
Click on the arrows to vote for the correct answer
A. B. C. D.C
Variance of two-stock portfolio =[++ 2=[(.7(.2+ (.3(.15+ (2)(.7)(.3)(.2)(.15)(.0032)] = .0217
To calculate the variance of a portfolio, we need to consider the weights of the individual stocks in the portfolio, as well as their variances and the correlation between them.
Let's assume the investor has allocated a weight of wA to Stock A and a weight of wB to Stock B, where wA + wB = 1. The variances of Stock A and Stock B are denoted as σA^2 and σB^2, respectively. The correlation between the two stocks is represented by ρ.
The formula to calculate the variance of a portfolio is as follows:
Variance of Portfolio = (wA^2 * σA^2) + (wB^2 * σB^2) + 2 * wA * wB * ρ * σA * σB
Now, let's plug in the values provided in the question:
σA^2 = 0.08 (variance of Stock A) σB^2 = 0.12 (variance of Stock B) ρ = 0.5 (correlation between the two stocks)
We need to find the values of wA and wB to calculate the portfolio variance. Unfortunately, the question doesn't provide any information about the weights of the stocks in the portfolio. Without the weights, we cannot accurately calculate the portfolio variance.
Therefore, based on the information provided in the question, we cannot determine the variance of the portfolio.