Question

Q1. Stock X has a standard deviation of 13% and stock Y’s standard deviation is 18%. The portfolio has exhibited a standard deviation of 10% when 65% of the funds were allocated in Stock X. What is the expected covariance between stocks X and Y?

Select one:
a. -0.21
b. -0.10
c. -0.95
d. -24.40

Q2. The set of portfolios with the maximum rate of return for every given risk level is known as the optimal frontier.

Select one:
a. False
b. True

Answer 1

1)

Standard deviation of portfolio =

where x and y are the securities

Weight in stock X = 0.65

Weight in stock Y = 1-0.65 = 0.35

Substituting we get,

0.1 = ((0.65*0.13)^2 + (0.35*0.18)^2 + 2*0.65*0.35*Covariance)^0.5

Squaring both the sides

0.01 = 0.01110925 + 0.455*Covariance

Covariance = -0.00243791208

Hence, covariance between X and Y = -0.00243791208 = -0.24%

2)

B. True

An efficient frontier gives the maximum return possible every level of risk level.