Financial Risk Manager Part 1

The portfolio variance is calculated using the formula:

$\sigma_p^2 = w_1^2\sigma_1^2 + w_2^2\sigma_2^2 + 2w_1w_2\text{Cov}(R_1,R_2)$

Where:

• $w_1 = 0.6$ (equities weight)
• $w_2 = 0.4$ (bonds weight)
• $\sigma_1^2 = 320$ (variance of equities)
• $\sigma_2^2 = 110$ (variance of bonds)
• $\text{Cov}(R_1,R_2) = 90$ (covariance between equities and bonds)

Plugging in the values:

$\sigma_p^2 = (0.6)^2 \times 320 + (0.4)^2 \times 110 + 2 \times 0.6 \times 0.4 \times 90$ $\sigma_p^2 = 0.36 \times 320 + 0.16 \times 110 + 0.48 \times 90$ $\sigma_p^2 = 115.2 + 17.6 + 43.2 = 176$

The portfolio variance is 176, which corresponds to option B.