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Answer: 428
Based on the covariance matrix: $$ \text{Variance}_{\text{Portfolio}} = w_1^2 \sigma_1^2 + w_2^2 \sigma_2^2 + 2w_1w_2 \rho_{1,2} \sigma_1 \sigma_2 $$ $$ = 0.60^2 \times 700 + 0.40^2 \times 500 + 2 \times 0.60 \times 0.40 \times 200 $$ $$ = 0.36 \times 700 + 0.16 \times 500 + 0.48 \times 200 $$ $$ = 252 + 80 + 96 = 428 $$ **Covariance Matrix (repeated for clarity):** | Fund | A | B | |------|-----|-----| | A | 700 | 200 | | B | 200 | 500 |
Author: Tanishq Prabhu
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A portfolio consists of two funds A and B. The weights of the two funds in the portfolio and the covariance matrix of the two funds are given in the following two exhibits.
Exhibit 1: Weight of the Funds in the Portfolio
| Fund | A | B |
|---|---|---|
| Weight | 60% | 40% |
Exhibit 2: Covariance Matrix
| Fund | A | B |
|---|---|---|
| A | 700 | 200 |
| B | 200 | 500 |
What is the portfolio variance?
A
428
B
500
C
324
D
328