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A portfolio is formed with 50% of your money in Stock 1 and 50% of your money in Stock 2. Stock 1...

Question:

A portfolio is formed with 50% of your money in Stock 1 and 50% of your money in Stock 2. Stock 1 has a standard deviation of 0.03, and Stock 2 has a standard deviation of 0.075. Which comes closest to the portfolio variance if the covariance between Stock 1 and Stock 2 is -0.005?

Portfolio Variance:

Portfolio variance assesses the dispersion of average returns of a portfolio from its mean.

It is the function of the variance of the portfolio constituent assets and the covariance between the each of them.

Answer and Explanation:

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Portfolio variance can be computed by using the following equation

Portfolio variance =(W1*sd1)^2+(W2*sd2)^2+2*W1*W2*(covariance between Stock 1&...

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Portfolio Weight, Return & Variance: Definition & Examples

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Chapter 12 / Lesson 1
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A portfolio can be designed in several different ways. It is important to understand the basics of a portfolio before building and managing one. In this lesson, we will go over the weight, return, and variance of a portfolio.


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