In: Finance
Let expected return of jay is X = 13%
& expected return of elizabeth is Y = 9%
Other given data:
Standard deviation of X (jay)
x= 0.75
Standard deviation of Y (elizabeth)
y = 0.42
covariance between x(jay) and y (elizabeth) i.e., cov(x,y)= 0.7
There is a portfolio (p) consist of X (jay) with weight 1 / 3 and Y (elizabeth) with weight 2 / 3
so, wx= 1 / 3 and wy= 2 / 3
Calculation of variance of portfolio (p):-
formula:-
2p
= w2x *
2x + w2y *
2y + 2 * wx * wy *
Covariance(x,y)
Lets put value in the above formula
2p
= (1 / 3)2 * (0.75)2 + (2 / 3)2 *
(0.42)2 + 2 * (1 /3 ) * (2 / 3) * 0.7
on solving we get,
variance of portfolio i.e
2p = 0.0625 + 0.0784 + 0.3111
So variance of portfolio i.e.,
2p = 0.452