Question

In: Statistics and Probability

Returns on stocks X and Y are listed below: Period 1 2 3 4 5 6...

Returns on stocks X and Y are listed below:

Period 1 2 3 4 5 6 7
Stock X 5% 6% -2% -4% 6% 10% 7%
Stock Y 1% -3% 6% 3% 12% 7% -5%

Consider a portfolio of 40% stock X and 60% stock Y.

What is the (population) variance of portfolio returns?

Please round your answer to six decimal places.

Note that the correct answer will be evaluated based on the full-precision result you would obtain using Excel.

Solutions

Expert Solution

Answer:-

Given That:-

Returns on stocks X and Y are listed below:

Consider a portfolio of 40% stock X and 60% stock Y.

The data given in the question statement is as below. Computing additional columns:

Period

Stock X

x

Stock Y

y

xy
1 0.05 0.01 0.0001 0.0004 0.0005 0.0025 0.0001
2 0.06 -0.03 0.0004 0.0036 -0.0018 0.0036 0.0009
3 -0.02 0.06 0.0036 0.0009 -0.0012 0.0004 0.0036
4 -0.04 0.03 0.0064 0.0000 -0.0012 0.0016 0.0009
5 0.06 0.12 0.0004 0.0081 0.0072 0.0036 0.0144
6 0.10 0.07 0.0036 0.0016 0.007 0.0100 0.0049
7 0.07 -0.05 0.0009 0.0064 -0.0035 0.0049 0.0025

= 0.04

= 0.03

= 0.0022

= 0.0030

Correlation Coefficient:

r = -0.0778

Weight of stock X = Wx = 0.40

Weight of stock Y = Wy = 0.60

What is the (population) variance of portfolio returns?

Variance of the portfolio:

Variance of the portfolio:  

Plz like it....


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