Question

Each column reports statistics for a particular investment. For example, the variance of Stock A is 0.0200, the expected return of the market is 0.16, and the covariance of Stock C with the Market is 0.0013

   STOCK     STOCK         STOCK    TIBILLS                   

                                                                        A                     B                     C

EXPECTED RETURN                         0.19       0.15                0.09              0.07

VARIANCE                                              .0200   .0196            .0205           .0000

COVARIANCE WITH MARKET   .0070   .0045            .0013          .0000

What comes closest to the standard deviation of a portfolio half invested in TBills and half invested in the market?

Select one: a. 0.00 b. 0.09 c. 0.07 d. 0.16 e. 0.04

Answer 1

Let T-Bill be denoted as asset A and Market portfolio, B.

Variance of 2 asset portfolio= WA^2* σA^2 + WB^2* σB^2 + 2* WA* σA* WB^* σB*Cov.

Where WA and WB are the weights of individual assets and σA and σB be the Standard Deviation respectively. Cov is the Covariance between them.

The Standard Deviation (σ) of portfolio is the Square root of Portfolio variance.

In the given case, Variance of T-Bill is zero. Hence result of each of the 3 segments of the formula is zero. Therefore, Portfolio Variance and Standard Deviation are Zero.

The answer is option (a).