Question

Create a portfolio using the three stocks and information below:

	Expected Return	Standard Deviation	Weight in Portfolio
Stock A	23.00%	10.00%	17.00%
Stock B	35.00%	26.00%	15.00%
Stock C	23.00%	12.00%	68.00%
----------------------	----------------------	----------------------	----------------------
Correlation (A,B)	0.1000	----------------------	----------------------
Correlation (A,C)	0.2900	----------------------	----------------------
Correlation (B,C)	0.5700	----------------------	----------------------

(Do not round intermediate calculations. Record your answers in decimal form and round your answers to 4 decimal places. Ex. x.xxxx)

What is the Correlation (A,A)?

What is the Correlation (B,B)?

What is the Correlation (C,C)?

What is the Covariance (A,A)?

What is the Covariance (A,B)?

What is the Covariance (A,C)?

What is the Covariance (B,A)?

What is the Covariance (B,B)?

What is the Covariance (B,C)?

What is the Covariance (C,A)?

What is the Covariance (C,B)?

What is the Covariance (C,C)?

What is the expected return on the portfolio above?

What is the variance on the portfolio above?

What is the standard deviation on the portfolio above?

Answer 1

	Expected Return	Standard Deviation	Weight in Portfolio	Variance
Stock A	23.00%	10.00%	17.00%	1.00%
Stock B	35.00%	26.00%	15.00%	6.76%
Stock C	23.00%	12.00%	68.00%	1.44%
Correlation (A,B)	0.10
Correlation (A,C)	0.29
Correlation (B,C)	0.57

Variance formula: variance = standard deviation^2

Correlation matrix: Correlation of an asset with itself is always one.

Correlation	A	B	C
A	1.00	0.10	0.29
B	0.10	1.00	0.57
C	0.29	0.57	1.00

Covariance(A,B) = Correlation(A,B)*standard deviation of A*standard deviation of B

Covariance(A,A) = Variance of A

Variance/Covariance matrix:

Variance/covariance	A	B	C
A	1.00%	0.26%	0.35%
B	0.26%	6.76%	1.78%
C	0.35%	1.78%	1.44%

Portfolio return, variance and standard deviation using the variance/Covariance matrix: