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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 Summary

Solution describes the steps to calculate variance of portfolio returns.

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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 provided by:
Lokesh Jain, MSc
Education
  • BEng (Hons) , Birla Institute of Technology and Science, India
  • MSc (Hons) , Birla Institute of Technology and Science, India
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