How JustAnswer Works:

  • Ask an Expert
    Experts are full of valuable knowledge and are ready to help with any question. Credentials confirmed by a Fortune 500 verification firm.
  • Get a Professional Answer
    Via email, text message, or notification as you wait on our site.
    Ask follow up questions if you need to.
  • 100% Satisfaction Guarantee
    Rate the answer you receive.

Ask F. Naz Your Own Question

F. Naz
F. Naz, B.Com
Category: Multiple Problems
Satisfied Customers: 5240
Experience:  have completed B.Com and CA Finalist
Type Your Multiple Problems Question Here...
F. Naz is online now
A new question is answered every 9 seconds

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

This answer was rated:

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.
Have a nice day

Click here for solution
Customer: replied 3 years ago.

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

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 3 years 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.

The third security is the B which you have invested from borrowing therefore it is equal to 0.49, thanks.
Customer: replied 3 years 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 :-)

Covariance of A is s1, Covarince of B is s2 and Covarinace of C is s3
Customer: replied 3 years ago.

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

It is given in quetion as 0.25 for A and 0.49 for B and 0.49 for C
Customer: replied 3 years ago.

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

Yes they are the same.
F. Naz and other Multiple Problems Specialists are ready to help you

Related Multiple Problems Questions