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# Risk and Return. Suppose you purchased \$1,000 of Stock A

### Resolved Question:

Risk and Return.
Suppose you purchased \$1,000 of Stock A with your own money. You then borrowed \$500 and used this money to buy Stock B. This means that the portfolio weights are as follows: wA = 1000/1000 = 1.00; wB = 500/1000 = 0.50; wC = -500/1000 = -0.50. The correlation coefficient between A and B is 0.70; interest rate on the risk-free asset (Security C) is 5%; variance of Stock A is 0.25; variance of Stock B is 0.49; expected return on Stock A is 10% and Stock B is 16%. Risk and Return. Calculate the variance of a portfolio of the three securities.
Submitted: 1 year ago.
Category: Multiple Problems
Expert:  F. Naz replied 1 year ago.
Have a nice day

Customer: replied 1 year ago.

Can you please show numbers inserted in formulas? Need to show full work with formulas presented. Thanks!

Expert:  F. Naz replied 1 year ago.
When you will click on respective cell the figures will be shown. However, it has been calculated as follows:
1*0.5*.25*.49+0.5*-0.5*.49*.49+1*-0.5*.25*.49 = -.06003

Customer: replied 1 year ago.

I see that part, I guess I was just wondering how you achieved the variance of the third security because it was not given. And the covariance.

Expert:  F. Naz replied 1 year ago.
The third security is the B which you have invested from borrowing therefore it is equal to 0.49, thanks.
Customer: replied 1 year ago.

ok, what about the part of the formula that states (Cov s1,s2) (Cov s3,s2) (Cov s1, s3) and then I get it :-)

Expert:  F. Naz replied 1 year ago.
Covariance of A is s1, Covarince of B is s2 and Covarinace of C is s3
Customer: replied 1 year ago.

Right but what are they?How do you find them?

Expert:  F. Naz replied 1 year ago.
It is given in quetion as 0.25 for A and 0.49 for B and 0.49 for C
Customer: replied 1 year ago.

So variance and covariance are the same? I am sorry, I didn't know they were the same.

Expert:  F. Naz replied 1 year ago.
Yes they are the same.
F. Naz, B.Com
Satisfied Customers: 4250
Experience: have completed B.Com and CA Finalist

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