Portfolio Problem
You are holding a stock portfolio comprised of three shares, referred to
as A, B & C respectively. Their characteristics include:
Return
Std
Dev
% of
Port
A
8%
16%
20%
B
12%
20%
30%
C
14%
28%
50%
The securities are correlated as follows:
A
B
C
A
B
C
1.00
0.65
0.10
1.00
-0.25
1.00
Questions:
1. Calculate the portfolio’s expected return
2. Calculate the portfolio’s variance & standard deviation
3. What proportion of total portfolio risk is contributed by Asset C
4. Now assume that you will combine the stock portfolio with a portfolio
of T Bills of equal market value, returning 4%. Show:
1. The expected return of the combined portfolio
2. The standard deviation of the combined portfolio
3. What is the Covariance between the two portfolios? Why?