A portfolio is comprised of two stocks A, and B. The position in stock A is...
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A portfolio is comprised of two stocks A, and B. The position in stock A is valued at WA (in £m) and has a daily standard deviation of gains and losses of A. The position in stock B is valued at wÅ (in £m) and has a daily standard deviation of gains and losses of OB. Returns in stock A and stock B have a correlation coefficient of p = Pab = Pba = 0. Denote by Cov = COVAB = COVBA the covariance between the two stocks and by Σ the variance-covariance matrix. a) Define and obtain the algebraic expression of the covariance between the two stocks b) Define and obtain the algebraic expression of matrix Σ i.e., the variance-covariance matrix c) Let w (w) be the column (row) vector of holdings. Using your answers to (a) and (b), show that the daily standard deviation of change in the portfolio value o (in £) is equal to: A portfolio is comprised of two stocks A, and B. The position in stock A is valued at WA (in £m) and has a daily standard deviation of gains and losses of A. The position in stock B is valued at wÅ (in £m) and has a daily standard deviation of gains and losses of OB. Returns in stock A and stock B have a correlation coefficient of p = Pab = Pba = 0. Denote by Cov = COVAB = COVBA the covariance between the two stocks and by Σ the variance-covariance matrix. a) Define and obtain the algebraic expression of the covariance between the two stocks b) Define and obtain the algebraic expression of matrix Σ i.e., the variance-covariance matrix c) Let w (w) be the column (row) vector of holdings. Using your answers to (a) and (b), show that the daily standard deviation of change in the portfolio value o (in £) is equal to:
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a The covariance between stocks A and B denoted as CovA B can be expressed algebraically as CovA B A ... View the full answer
Related Book For
Income Tax Fundamentals 2013
ISBN: 9781285586618
31st Edition
Authors: Gerald E. Whittenburg, Martha Altus Buller, Steven L Gill
Posted Date:
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