CMA Final · Strategic Financial Management · Portfolio Theory and Practice
A portfolio has weights of 40% in Stock M and 60% in Stock N. The standard deviations are 20% for M and 30% for N, and the correlation between them is 0.5. What is the portfolio variance in (%)^2?
The portfolio variance works out to 64 plus 324 plus 144, which is 532 in percentage-squared terms. This is not among the listed options, so the item is flawed.
- A456Correct
- B468
- C516
- D612
Explanation
Variance = (0.4x20)^2 + (0.6x30)^2 + 2(0.4)(0.6)(0.5)(20)(30) = 64 + 324 + 144 = 532. Checking: 2 x 0.4 x 0.6 x 0.5 = 0.24; 0.24 x 600 = 144; total 532. None of the options match, so this item is flawed.
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