[Fin525sp09] mid term #8

[Adam Gehr]

Sorry, the covariance is 0.4*b1*b2*5*7

Adam Gehr



On Tue, 28 Apr 2009, Adam Gehr wrote:

> 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
>> 
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