Batman Stock has exhibited a standard deviation in stock returns of 0.5, whereas

Question

Batman Stock has exhibited a standard deviation in stock returns of 0.5, whereas Superman Stock has exhibited a standard deviation of 0.6. The correlation coefficient between the stock returns is 0.5. What is the variance of a portfolio composed of 70 percent Batman and 30 percent Superman?

A                                                                                                                  0.1549

B

0.2179

C

0.4668

D

0.5500

A                                                                                                                  0.1549

B

0.2179

C

0.4668

D

0.5500

Explanation / Answer

Variance of portfolio =w2A*%u03C32(RA) + w2B*%u03C32(RB) + 2*(wA)*(wB)*cov(RA, RB)

= (0.70^2)*0.5^2 + (0.30^2)*0.6^2+2*0.70*0.30*0.50*0.50*0.60

=0.2179

B 0.2179

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