Question

a portfolio is composed of 60% stock and 40% bonds. The variance of stovk is 160 and the variance of bonds is 120. The convariance is 40. What is the portfolio's variance?

Select One:

a. 96

b. 114

c. 101

d. 168

Answer 1

Correct answer is 96

Standard deviation of Stock = (160)1/2 = 12.65

Standard deviation of Bond = (120)1/2 = 10.95

Corr of stock and bond = 40 / (12.65 x 10.9) = 0.29

Portfolio varinace = (Weight of stcok)2 x Varinace of stock + (Weight of Bond)2 x Varinace of bond + 2 x Weight of stcok x Weight of Bond x Standard Deviation of stock x Standard Deviation of Bond x Corr of stock and bond

= (0.60)2 x 160 + (0.40)2 x 120 + 2 x 0.60 x 12.65 x 0.40 x 10.95 x 0.29

= 57.6 + 19.2 + 19.2816

=96.08 or say 96

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