Question

An investor is putting together an investment portfolio, which will consist of three asset classes: U.S. stocks, U.S. bonds, and a money market account. The investor has projected the following key variables: expected return risk (standard deviation) U.S. stocks 14% 12% U.S. bonds 8% 7% money market 6% 4% The correlation between U.S. stocks and U.S. bonds is 0.40. The correlation between U.S. stocks and the money market is 0.22. The correlation between U.S. bonds and the money market is 0.70. Write out the formula (with the numbers filled in) to calculate the variance of the following portfolio: U.S. stocks: 60%; U.S. bonds: 20%; money market: 20%. You do not have to do the actual calculation. (8 points).

Answer #1

Portfolio Variance with 3 Securities

where W_{a} = Weight of stock a ; W_{b} = Weight
of Stock B; W_{c} = Weight of Stock C σ_{a} =
Standard deviation of stock A; σ_{b} = Standard deviation
of stock B; σ_{c} = Standard deviation of stock C; r
_{ab}= Correlation Coefficient between a & b ; r
_{bc}= Correlation Coefficient between b & c; r
_{ac}= Correlation Coefficient between a & c

With the information given in the question

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