Averages covariance matrix 1.) For a portfolio formed by 30% in asset 2 and 70%

Question

Averages

covariance matrix

1.) For a portfolio formed by 30% in asset 2 and 70% in asset 3. Calculate the return on the portfolio.

2.) Calculate the variance of the portfolio formed by 30% in asset 2 and 70% in asset 3.

3.) Using the variance from question 3b, calculate the standard deviation of the portfolio formed by 30% in asset 2 and 70% in asset 3.

4.) Using the average and standard deviation from previous questions, calculate the Sharpe ratio for the portfolio formed by 30% in asset 2 and 70% in asset 3.

5.) Calculate the average of a portfolio formed by 35% in asset 1 and 65% in asset 2.

Asset 1 2 3 Returns 0.25 0.12 0.08

Explanation / Answer

1).

2).

Covariance of 2 & 3 = 0.3

Weightage of 2 = 30%

Weightage of 3 = 70%

Variance of 2 = 0.70

Variance of 3 = 0.90

Variance of portfolio = weight(2)^2*variance(2) + weight(3)^2*variance(3) + 2*weight(2)*weight(3)*covariance(2,3)

Variance of portfolio = 0.63

3). Standard Deviation = square root of variance

Standard Deviation = sqare root of (0.63) = 0.79

Asset 1 Asset 3 Returns 25% 8% Weightage 30% 70% Return on portfolio= 0.25*0.30+0.08+0.70 Return on portfolio= 13.1%

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