Answer: 428.04

The portfolio variance can be calculated using the formula: **Portfolio Variance = w₁²σ₁² + w₂²σ₂² + 2w₁w₂Cov(A,B)** Where: - w₁ = weight of fund A = 0.60 - w₂ = weight of fund B = 0.40 - σ₁² = variance of fund A = 700 - σ₂² = variance of fund B = 500 - Cov(A,B) = covariance between A and B = 200 **Calculation:** Portfolio Variance = (0.60)² × 700 + (0.40)² × 500 + 2 × 0.60 × 0.40 × 200 = 0.36 × 700 + 0.16 × 500 + 0.48 × 200 = 252 + 80 + 96 = **428** Therefore, the portfolio variance is 428.04 (rounded to two decimal places). **Alternative approach using the covariance matrix directly:** The portfolio variance can also be calculated as: [w₁ w₂] × Covariance Matrix × [w₁ w₂]ᵀ = [0.60 0.40] × [[700, 200], [200, 500]] × [0.60, 0.40]ᵀ = [0.60×700 + 0.40×200, 0.60×200 + 0.40×500] × [0.60, 0.40]ᵀ = [420 + 80, 120 + 200] × [0.60, 0.40]ᵀ = [500, 320] × [0.60, 0.40]ᵀ = 500×0.60 + 320×0.40 = 300 + 128 = 428

Author: Nikitesh Somanthe