Consider formulas (B.32) and (B.33). Let X stand for the rate of return on a security, say,

Question:

Consider formulas (B.32) and (B.33). Let X stand for the rate of return on a security, say, IBM, and Y the rate of return on another security, say, General Foods. Let s2X = 16, s2Y = 9, and r = - 0.8. What is the variance of (X + Y) in this case? Is it greater than or smaller than var (X) + var (Y)? In this instance, is it better to invest equally in the two securities (i.e., diversify) than in either security exclusively? This problem is the essence of the theory of finance.
Portfolio
A portfolio is a grouping of financial assets such as stocks, bonds, commodities, currencies and cash equivalents, as well as their fund counterparts, including mutual, exchange-traded and closed funds. A portfolio can also consist of non-publicly...