1. A portfolio is formed with 50% of your money in Stock 1 and 50% of your money
ID: 2735574 • Letter: 1
Question
1. 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?
-0.002
-0.0002
-0.011
-0.00086875
-0.005
2. Microsoft is currently $30 per share. Suppose that the firm announces a 2 for 3 stock split. Based solely on this information, what will the share price of Microsoft to be after the split?
$20
$15
$33
$30
$45
a.-0.002
b.-0.0002
c.-0.011
d.-0.00086875
e.-0.005
Explanation / Answer
1.Portfolio variance can be computed by using the following equation
Portfolio variance =(W1*1)^2+(W2*2)^2+2*W1*W2*covariance between Stock 1& 2
W1 = the portfolio weight of the stock 1
W2 = the portfolio weight of the stock 2
1= the standard deviation of the stock 1
2 = the standard deviation of the stock 2
now Portfolio variance=(0.03*.50)^2+(0.075*.05)^2+2*.50*.50*-0.005
= -0.002
Answer is A )
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