Question

Which of the following values is/are useful when evaluating the performance of a portfolio of two stocks?

I. Each stock's average return

II. Each stock's standard deviation

III. Covariance between the two stocks

Answer 1

Values is/are useful when evaluating the performance of a portfolio of two stocks is Covariance between the two stocks in a portfolio. Option III

Covariance between two stock is a relationship between the movement of two stock prices prices. In the stock prices are moving in same direction, which could be upward or downward then the covarinace between the stock is positive and when they move in oppostie direction which is one stock going upward and other going downward at the same time then the covarinace between the stock is negative. Two stock with negative covariance is genreally sutiable for a portfolio to reduce the risk up to some extent.

Covariance can be calculated as Summation of devation 2 stock's return  

Further if you want to evalaute the performance of a single security then its avearge return and standard devation from the mean return is useful.