Finance IIWeek 1Question 5aA portfolio consists of three stocks, 30% is invested in thefirst stock, 25% in the second stock and 45% in the third.The yearly average return is 10% for the first stock, 12%for the second and 13% for the third. The below table givesthe historical VarianceCovariance matrix of the (yearly) stockreturns:
Introduction
Personal Introduction
Course Introduction
Question 1
Question 2
Question 3
a
b
c
d
Question 5
a
b
Question 6
a
b
c
Question 7
a
b
Question 8
a
b
c
0.10
0.04
0.03
0.04
0.20
0.04
0.03
0.04
0.60
I
Compute the average return of the portfolio.
¯
R
p
=
N
X
i
=1
w
i
·
¯
R
i
= 0
.
3
·
10%+0
.
25
·
12%+0
.
45
·
13% = 11
.
85%
Finance IIWeek 1IntroductionPersonal IntroductionCourse IntroductionQuestion 1Question 2Question 3abcdQuestion 5abQuestion 5bThe below table gives the historical VarianceCovariance matrix of the (yearly) stock returns:0.100.040.030.040.200.040.030.040.60I¯Rp= 11.85%ICompute the yearly variance and volatility of theportfolio return.
Question 6
a
b
c
Question 7
a
b
Question 8
a
b
c
Finance IIWeek 1IntroductionPersonal IntroductionCourse IntroductionQuestion 1Question 2
Question 5ab
Question 6
a
b
c
Question 7
Question 8
a
b
c
Question 5bThe below table gives the historical VarianceCovariance matrix of the (yearly) stock returns:0.100.040.030.040.200.040.030.040.60
ICompute the yearly variance and volatility of theportfolio return.
Var
p
=
N
X
i
=1
w
2
i
Var
(
R
i
) + 2
N

1
X
i
=1
N
X
j
=
i
+1
w
i
w
j
cov
(
R
i
,
R
j
)
Finance II
Week 1
Introduction
Personal Introduction
Course Introduction
Question 1
Question 2
Question 3
a
b
c
d
Question 5
a
b
Question 6
a
b
c
Question 7
a
b
Question 8
a
b
c
Question 5b
The below table gives the historical VarianceCovariance ma
trix of the (yearly) stock returns:
0.10
0.04
0.03
0.04
0.20
0.04
0.03
0.04
0.60
I
¯
R
p
= 11
.
85%
I
Var
p
= 0
.
166
I
Compute the yearly variance and volatility of the
portfolio return.
σ
p
=
p
Var
p
=
√
0
.
166 = 40
.
76%
Finance II
Week 1
Introduction
Personal Introduction
Course Introduction
Question 1
Question 2
Question 3
a
b
c
d
Question 5
a
b
Question 6
a
b
c
Question 7
a
b
Question 8
a
b
c
Question 6
A portfolio consists of 8 stocks. The following is known about
the weights
w
i
, the volatilities and the correlations:
I
w
1
=
w
2
= 0
.
2
I
w
3
=
w
4
=
w
5
=
w
6
=
w
7
=
w
8
= 0
.
1
I
ρ
ij
= 0
.
3
,
i
6
=
j
I
σ
i
= 40%
Finance II
Week 1
Introduction
Personal Introduction
Course Introduction
Question 1
Question 2
Question 3
a
b
c
d
Question 5
a
b
Question 6
a
b
c
Question 7
Question 6a
I
w
1
=
w
2
= 0
.
2
I
w
3
=
w
4
=
w
5
=
w
6
=
w
7
=
w
8
= 0
.
1
I
ρ
ij
= 0
.
3
,
i
6
=
j
I
σ
i
= 40%
, σ
2
i
= (40%)
2
= 0
.
16
I
Cov
ij
=
ρ
ij
σ
i
σ
j
= 0
.
3
·
40%
·
40% = 0
.
048
I
Compute the variance and volatility of the portfolio
return
Var
p
=
N
X
i
=1
w
2
i
Var
(
R
i
) + 2
N

1
X
i
=1
N
X
j
=
i
+1
w
i
w
j
cov
(
R
i
,
R
j
)
Finance II
Week 1
Introduction
Personal Introduction
Course Introduction
Question 1
Question 2
Question 3
a
b
c
d
Question 5
a
b
Question 6
a
b
c
Question 7
a
b
Question 8
a
b
c
Question 6b
Now suppose all the weights are the same.
Again compute
the variance and volatility of the portfolio return.
Finance II
Week 1
Introduction
Personal Introduction
Course Introduction
Question 1
Question 2
You've reached the end of your free preview.
Want to read all 49 pages?
 Fall '16
 Schouten