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    Calculating variance of portfolio returns

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    Hyacinth Macaw invests 60% of her funds in stock I and the balance in stock J. The standard deviation of returns on I is 10%, and on J it is 20%. Calculate the variance of portfolio returns, assuming

    a. The correlation between the returns is 1.0.
    b. The correlation is .5.
    c. The correlation is 0.

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    Solution Preview

    a. The correlation between the returns is 1.0.

    Weight of stock I=wa=0.6
    Weight of stock J=wb=0.4
    Standard deviation of stock I=si=10%
    Standard deviation of stock J=sj=20%
    Correlation coefficient between stock I and stock J=Corr(IJ)=1.0 ...

    Solution Summary

    Solution describes the steps to calculate variance of portfolio returns.