Final answer:
To calculate the portfolio variance, use the formula Vp = w1^2 * σ1^2 + w2^2 * σ2^2 + 2 * w1 * w2 * Cov(1,2), assigning a weight of 0.5 to each stock.
Step-by-step explanation:
Portfolio variance is a statistical measure that evaluates the risk associated with a diversified investment portfolio. It considers the individual variances of assets and their correlations to assess how the assets' returns move relative to each other. A lower portfolio variance suggests a more diversified and potentially less risky portfolio, while a higher variance indicates greater risk. The calculation involves weighing the individual variances and covariances of assets within the portfolio. This metric is crucial for investors seeking to optimize their portfolio for a balance of risk and return.
To calculate the portfolio variance, we can use the formula:
Vp = w1^2 * σ1^2 + w2^2 * σ2^2 + 2 * w1 * w2 * Cov(1,2)
In this case, since the portfolio is equally weighted, we can assign a weight of 0.5 to each stock.
Vp = (0.5^2 * (0.117^2)) + (0.5^2 * (0.059^2)) + 2 * (0.5) * (0.5) * 0.0254
Vp = 0.008590
Therefore, the portfolio variance is 0.008590.
The correct option is (a) 0.008590.