Business, 07.01.2021 18:50 marie2061

Golden Eagle invests 60% of their funds in stock I and the balance in stock J. The standard deviation of returns on I is 10%, and on J it is 20%. Calculate the variance of portfolio returns, assuming The correlation between the returns is 1.0 The correlation is .5. The correlation is 0.

Answers: 1

Show answers

Answers

Answer from: eskarletche8

Variance of the portfolio = 1.96% for Correlation 1.0

Variance of the portfolio = 1.48% for Correlation 0.5

Variance of the portfolio = 1.00% for Correlation 0.0

Explanation:

Data Given:

Investment = 60% in stock I and the balance in ( 40% in stock J) = weights

Standard deviation on returns on I = 10%

Standard deviation on returns on J = 20%

Required:

Variance of portfolio returns.

Assumptions:

1) The correlation between returns is 1.0

2) The correlation is 0.5

3) The correlation is 0.0

Solution:σLet's suppose,

Weight of Stock I = w1

Weight of the Stock J = w2

so,

w1 = 60%

w2 = 40%

C = Correlation

SD = Standard deviation

SD1 = SD of stock I

SD2 = SD of stock J

So, the formula for the variance of the portfolio will be:

Variance of the portfolio = $w1^{2}$ . $SD1^{2}$ + $w2^{2}$ . $SD2^{2}$ + 2(w1.w2.C.SD1.SD2)

Plugging in the values for Assumption 1, where C = 1.0

Variance of the portfolio = $0.60^{2}$ . $0.10^{2}$ + $0.40^{2}$ . $0.20^{2}$ + 2(0.60 x 0.40 x 1.0 x 0.10 x 0.20)

Hence,

Variance of the portfolio = 0.0196 x100 to get it in percentage

Variance of the portfolio = 1.96%

Similarly for the assumption 2, where C = 0.5

Variance of the Portfolio = $w1^{2}$ . $SD1^{2}$ + $w2^{2}$ . $SD2^{2}$ + 2(w1.w2.C.SD1.SD2)

Variance of the Portfolio = $0.60^{2}$ . $0.10^{2}$ + $0.40^{2}$ . $0.20^{2}$ + 2(0.60 x 0.40 x 0.5 x 0.10 x 0.20)

Variance of the Portfolio = 0.0148 x 100

Variance of the Portfolio = 1.48%

Similarly, for assumption 3, where C = 0.0

Variance of the Portfolio = $w1^{2}$ . $SD1^{2}$ + $w2^{2}$ . $SD2^{2}$ + 2(w1.w2.C.SD1.SD2)

Variance of the Portfolio = $0.60^{2}$ . $0.10^{2}$ + $0.40^{2}$ . $0.20^{2}$ + 2(0.60 x 0.40 x 0.0 x 0.10 x 0.20)

Variance of the Portfolio = 0.01 x 100

Variance of the Portfolio = 1%

Answer from: Quest

muslims control the north africa during the period of 1500 up

to 1800. they made a barrier to prevent further european exploration from

entering the africa from the north. however, the dutch ware still able to move

toward the interior with having south africa as one of the routes leading to

the east for trading with asia.

Answer from: Quest

reducing the scale of the market for a new product.

Other questions on the subject: Business

Business, 22.06.2019 08:30, justalikri

Most angel investors expect a return on investment of question options: 20% to 25% over 5 years. 15% to 20% over 5 years. 75% over 10 years. 100% over 5 years.

Answers: 1

continue

Business, 23.06.2019 00:40, briarkaltvedt

You are a team of marketing consultants. it is 2008 and the great recession has struck. one of your clients is whole foods market (sometimes known as whole paycheck). wfm has come to you and asked for strategic advice on how to adapt their product and pricing strategies in light of the economic downturn: 1. advise wfm on the various approaches that could be taken to reducing price. be sure to consider potential psychological impact of price reductions on wfm consumers. 2. based on the options outlined in part 1, recommend an approach and support with marketing theory.

Answers: 2

continue

Business, 23.06.2019 05:30, 24nelsoaddh

What are some examples of types of investments on the part of manufactures that result in growth? how does this improve a nation's standard of living?

Answers: 3

continue

Business, 24.06.2019 02:30, cherishofomah04

The private-sector group that currently has the authority to establish generally accepted accounting principles in the united states is the:

Answers: 1

continue

You know the right answer?

Golden Eagle invests 60% of their funds in stock I and the balance in stock J. The standard deviatio...