Question

Suppose you invest $7,000 in Stock A and $3,000 in Stock B. The variance of Stock A is 50 percent, the variance of Stock B is also 50 percent, and the covariance between the two stocks is 0 percent. What is the variance of your portfolio in percent?

Answer 1

The variance of portfolio is 29%

Step-by-step explanation:

Portfolio variances measures the variations of the portfolio returns or how disperse the returns are.

To calculate the variance of the portfolio, we will use the following formula,

The formula for portfolio variance is,

Variance = wA² * vA + wB² * vB + 2 * wA * wB * Covariance

Where,

• vA and vB is are the variances of stock A and stock B
• wA and wB represents the weightage of stock A and B in the portfolio

Total investment in portfolio = 7000 + 3000 = 10000

Weight of Stock A = 7000/10000 = 0.7

Weight of stock B = 3000/10000 = 0.3

Variance = 0.7² * 0.5 + 0.3² * 0.5 + 2 * 0.7 * 0.3 * 0

Variance = 0.29 or 29%