Portfolio Covariance Calculation Quiz

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Questions and Answers

Which of the following is the formula for calculating the covariance between two portfolios?

Cov(Portfolio 1, Portfolio 2) = Weight A * Weight B * Cov(A, B) + Weight B * Weight C * Cov(B, C) + Weight C * Weight A * Cov(C, A)
Cov(Portfolio 1, Portfolio 2) = Weight A * Weight A * Cov(A, A) + Weight A * Weight B * Cov(A, B) + Weight A * Weight C * Cov(A, C) + Weight B * Weight A * Cov(B, A) + Weight B * Weight B * Cov(B, B) + Weight B * Weight C * Cov(B, C) + Weight C * Weight A * Cov(C, A) + Weight C * Weight B * Cov(C, B) + Weight C * Weight C * Cov(C, C) (correct)
Cov(Portfolio 1, Portfolio 2) = Weight A * Weight A * Cov(A, A) + Weight B * Weight B * Cov(B, B) + Weight C * Weight C * Cov(C, C)
Cov(Portfolio 1, Portfolio 2) = Weight A * Weight A * Cov(A, A) + Weight A * Weight B * Cov(A, B) + Weight B * Weight A * Cov(B, A) + Weight B * Weight B * Cov(B, B)

What is the correlation coefficient between asset A and asset B?

0.33
0.17
0.76 (correct)
0.23

What is the correlation coefficient between asset C and both asset A and asset B?

0.17
0.23
0 (correct)
0.76

What is the formula for calculating the standard deviation of a portfolio?

<p>(\sigma_{\text{Portfolio}} = \sqrt{Weight A^2 \times \sigma_A^2 + Weight B^2 \times \sigma_B^2 + Weight C^2 \times \sigma_C^2 + 2 \times Weight A \times Weight B \times \sigma_A \times \sigma_B \times \text{Corr}(A, B) + 2 \times Weight A \times Weight C \times \sigma_A \times \sigma_C \times \text{Corr}(A, C) + 2 \times Weight B \times Weight C \times \sigma_B \times \sigma_C \times \text{Corr}(B, C)}) (C)</p>

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