Question

Create a portfolio using the four stocks and information below: 

(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 variance of A?

What is the variance of B?

What is the variance of C?

What is the variance of D?

What is the Correlation (A,A)?

What is the Correlation (B,B)?

What is the Correlation (C,C)?

What is the Correlation (D,D)?

What is the Covariance (A,A)?

What is the Covariance (A,B)?

What is the Covariance (A,C)?

What is the Covariance (A,D)?

What is the Covariance (B,A)?

What is the Covariance (B,B)?

What is the Covariance (B,C)?

What is the Covariance (B,D)?

What is the Covariance (C,A)?

What is the Covariance (C,B)?

What is the Covariance (C,C)?

What is the Covariance (C,D)?

What is the Covariance (D,A)?

What is the Covariance (D,B)?

What is the Covariance (D,C)?

What is the Covariance (D,D)?

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

Below table shows the variance of the stocks:

Stock	Expected return	Standard Deviation	Portfolio weight	Variance
A	22.00000%	17.00000%	10.00000%	17%2 = 2.89000%
B	30.00000%	17.00000%	19.00000%	17%2 =2.89000%
C	11.00000%	36.00000%	28.00000%	36%2 =12.96000%
D	23.00000%	24.00000%	43.00000%	24%2 =5.76000%

Variance = square of standard deviation

Below is the correlation matrix:

Correlation Matrix	A	B	C	D
A	1	0.98	0.35	0.97
B	0.98	1	0.98	0.45
C	0.35	0.98	1	0.4
D	0.97	0.45	0.4	1

• Correlation of two asset tells that how closely the returns of the two assets move together
• Following correlations are given: AB, AC, AD, BC, BD, CD
• Correlation of a stock with itself is always 1 because the stock returns of stock moves completely together with its own return

standard deviation

Below is the covariance matrix

Covariance Matrix	A	B	C	D
A	2.8900%	2.8322%	2.1420%	3.9576%
B	2.8322%	2.8900%	5.9976%	1.8360%
C	2.1420%	5.9976%	12.9600%	3.4560%
D	3.9576%	1.8360%	3.4560%	5.7600%

• Covariance of a stock with itself is equal to the variance of the stock
• 
• 

correlation