What is the variance of return of a three-stock portfolio (with unequal weights 25%, 50% and 25%) that produced returns of 20%, 25% and 30%, respectively?
A)10.00
B)12.50
C)15.00
D)20.00 Mean =

Question

Quizplus · Accepted Answer

First, we need to calculate the portfolio's expected return:
Expected return = (0.25 x 20%) + (0.50 x 25%) + (0.25 x 30%) = 23.75%
Next, we need to calculate the portfolio's variance:
Variance = (0.25^2 x (20% - 23.75%)^2) + (0.5^2 x (25% - 23.75%)^2) + (0.25^2 x (30% - 23.75%)^2) = 0.03125
Therefore, the variance of the portfolio is 3.125%, or 0.03125 in decimal form. So, the correct answer is B (12.50).

What Is the Variance of Return of a Three-Stock Portfolio