Question

as a financial student you are presented with the following forecasted returns by Anna who requires your assistance:

      Assets($)

Year	Shares	Bonds	Derivatives
2021	45	64	120
2022	76	71	90
2023	50	102	77
2024	29	90	63
2025	80	84	70

You are requested to compute the risk involved if Anna decides to invest in the following portfolio:

a) 20% in shares and the rest in Derivatives?

Answer 1

To calculate risk involved in the portfolio consisting of 20% shares and 80% Derivatives, first we have to find out following -

1. Standard Deviation of Shares (SD1)
2. Standard Deviation of Derivative (SD2)
3. Correlation between shares and derivative. (r_{​​​​​​12}​​​​)
4. Covariance between shares and derivative (Cov_{​​​​(x,y)})

Now see the photos of Answer.