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

Question

Quizplus · Accepted Answer

First, we need to calculate the portfolio return: 
Portfolio return = (0.25 x 20%) + (0.50 x 25%) + (0.25 x 30%) = 23.75%

Next, we need to calculate the variance: 
Variance = [(0.25 x 20% - 23.75%)^2 + (0.50 x 25% - 23.75%)^2 + (0.25 x 30% - 23.75%)^2] / 3 
Variance = 0.00375

Finally, we can convert the variance back to a percentage to get: 
Variance = 0.00375 x 100% = 0.375%

Therefore, the variance of the return of the three-stock portfolio is 0.375%. 
The closest answer choice is B, 12.50, but we need to remember to convert the decimal to a percentage by multiplying by 100.

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