[Fin525sp09] mid term #8

[Adam Gehr]

First calculate the sensitivities of the resulting portfolio to the two 
factors: b1 is 3.2 and b2 is 2.4 (these are just weighted averages).
Now the portfolio's return is a weighted sum of 4 random variables: I1, 
I2, ea and eb. The first two are correlated with each other, the 
respective weights are:
b1, b2, 0.4, 0.6
The covariance between I1 and I2 is 0.4*b1*b2
now just use your double summation formula for the variance and take the 
square root to get the standard deviation.

Adam Gehr


On Tue, 28 Apr 2009, Mark Barnick wrote:

> Prof. Gehr,
>
> Can you please help me with figuring out how to do problem #8 on the sample
> midterm?  I don't know where I am going wrong.  If we have the weights,
> standard deviations, and the correlation between the 2 securities, I would
> think finding the stan dev. of the portfolio would be easily calculated.
> However, I must be missing a step or multiple steps.  Can you please advise
> me on this problem please?  Thanks.
>
> -Mark
>