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Unformatted text preview: volatility of a stocks returns with the tendency of those returns to move up or down at the same time other stocks move up or down. Cov (xy) = (x i Expected x) * (y i Expected y) (Probability) Cov (xy) = [(11  7.7)*(14  9.0)*.6] + [(5  7.7) *(4  9.0)*.3] + = [(4  7.7)*(6  9.0)*.1] = 9.9 + 4.05 + 17.55 = 31.50 r xy = 31.50/(4.73*6.71) = 31.50/31.74 = 0.99 Portfolio Variance = w 2 x 2 x + w 2 y y 2 + 2w x w y r xy x y = (.4 2 *22.41) + (.6 2 *45.0) + 2*.4*.6*.99*4.73*6.71 = 3.586 + 16.20 + 15.082 = 34.868 Portfolio Std. Dev = 5.90% What if we form a portfolio of 20% X and 80%Y? What is the expected return of the portfolio? What is the portfolio standard deviation? Expected return = (.2 * 7.7) + (.8 * 9.0) = 1.54 + 7.2 = 8.74 % Portfolio Variance = = (.2 2 *22.41) + (.8 2 *45.0) + 2*.2*.8*.99*4.73*6.71 = 0.896 + 28.80 + 10.055 = 39.751 Portfolio Standard Deviation = 6.30%...
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 Spring '08
 melissawilliams

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