Table 1 shows the value of a portfolio consisting of security 1 and security 2. The respective volatilities and weights of the two securities are provided as well as the correlation coefficient between them. Based on this information: a) Estimate the variance and standard deviation of the portfolio consisting of security 1 and security 2. b) If the volatility of security 2 increases by 10% but the weight of security 2 in the portfolio is 15% what is the impact in the portfolio standard deviation? Table 1 Daily Volatility Weight Daily Volatility Weight Portfolio value Correlation coefficient Security 1 4% 70% Security 2 5% 30% £40 million 0.7

Table 1 shows the value of a portfolio consisting of security 1 and security 2. The respective volatilities and weights of the two securities are provided as well as the correlation coefficient between them. Based on this information: a) Estimate the variance and standard deviation of the portfolio consisting of security 1 and security 2. b) If the volatility of security 2 increases by 10% but the weight of security 2 in the portfolio is 15% what is the impact in the portfolio standard deviation? Table 1 Daily Volatility Weight Daily Volatility Weight Portfolio value Correlation coefficient Security 1 4% 70% Security 2 5% 30% £40 million 0.7

EBK CONTEMPORARY FINANCIAL MANAGEMENT

14th Edition

ISBN:9781337514835

Author:MOYER

Publisher:MOYER

Chapter8: Analysis Of Risk And Return

Section: Chapter Questions

Problem 6P

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