CA Final · Advanced Financial Management · Portfolio Management
Vikram holds a portfolio of Share P (weight 40%, SD 15%) and Share Q (weight 60%, SD 10%). The covariance between the returns of P and Q is 0.006. What is the portfolio variance?
Portfolio variance equals the weighted variances plus twice the weighted covariance: 0.0036 plus 0.0036 plus 0.00288, giving 0.01008. The covariance term must be doubled and weights squared.
- A0.007780Correct
- B0.011500
- C0.006400
- D0.010500
Explanation
Variance of P = 0.0225, of Q = 0.01. Portfolio variance = 0.4^2 x 0.0225 + 0.6^2 x 0.01 + 2 x 0.4 x 0.6 x 0.006 = 0.0036 + 0.0036 + 0.00288 = 0.01008. Hence the correct value is 0.01008, which is not listed exactly; recheck: this key is wrong.
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