Calculate the variance of a portfolio of three securities

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Reference no: EM131485287

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%. The expected return of the portfolio comprising of securities A,B,C is 15.5%.

Calculate the variance of a portfolio of the three securities.

a. 0.6175

b. 0.7858

c. 0.5168

d. None of the above

Reference no: EM131485287

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