Consider the following covariances between securities: Duke Microsoft Walmart Duke 0

Finance May 02, 2021

Consider the following covariances between securities:

Duke Microsoft Walmart

Duke 0.0568 − 0.0193 0.0037

Microsoft − 0.0193 0.2420 0.1277

Walmart 0.0037 0.1277 0.1413

The variance on a portfolio that is made up of a $1,057 investments in Duke and a $3,068 investment in Walmart stock is ________.

Expert Solution

Computation of Variance of Portfolio:

Total Portfolio = Investment in Duke + Investment in Walmart = $1,057 + $3,068 = $4,125

Weight of Duke = Investment in Duke / Total portfolio = 1057 / 4125 = 25.62%

Weight of Walmart = Investment in Walmart / Total portfolio = 2357 / 3366 = 74.38%

Variance of Portfolio = Variance of Duke * Weight of Duke^2 + Variance of Walmart * Weight of Walmart^2 + 2 * Weight of Duke * Weight of Walmart * Covariance between Duke and Walmart

= 0.0568 * 0.2562^2 + 0.1413 * 0.7438^2 + 2 * 0.2562 * 0.7438 * 0.0037

Variance of Portfolio = 0.0833

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