Suppose you own a two-security portfolio.You have 25.0% of your funds invested in Security A and the balance of your funds invested in Security B.Security A has a standard deviation of 8.0% and Security B has a standard deviation of 12.0%.What is the covariance of the returns on Securities A and B if the portfolio standard deviation is 10.0%?
A)0.0040
B)0.0093
C)0.0147
D)0.0258

Question

Quizplus · Accepted Answer

The correct answer is A because the covariance of the returns on Securities A and B is 0.0040. This can be calculated using the formula:covariance = (portfolio standard deviation)^2 - (weight of Security A * (standard deviation of Security A)^2) - (weight of Security B * (standard deviation of Security B)^2)covariance = (10.0%)^2 - (0.25 * (8.0%)^2) - (0.75 * (12.0%)^2)covariance = 0.0040

Suppose You Own a Two-Security Portfolio