0
$\begingroup$

I have two assets: A has an expected value of $12$ % and a standard deviation of $8$%. B has an expected value of $15$ % and a standard deviation of $12$ %.

Suppose that we invest $75$ % in A and $25$ % in B

Here is what the solution do to get the variance

$(.75 \cdot .08)^2 + (.25 \cdot .12)^2 \cdot2 \cdot .75 \cdot .25 \cdot .4 \cdot .08 \cdot .12 = 0.00594$

My question is : How do I get the $.4$ ?

From wikipedia and this site, I found that It is $\rho (a,b)$

And when I do $\rho (a,b)$ I get : $( (0.12-.1)(0.08-.1) ) / (0.08 * 0.12 ) $

it gives me $\rho (a,b) =$ $ -0.00040 \div 0.0096 = -0.04167$

Which is not $0.4$

$\endgroup$
1
$\begingroup$

You are rarely asked to find the variance of a weighted distribution without knowledge of the joint distribution of A and B. If only given two distributions without any indication of their correlation, it is not possible to calculate $p$. In particular, I dont know how you got the $Cov(A,B) = ((0.12−.1)(0.08−.1))$ part.

Check the question and the solution to ensure that you are not missing vital information to solving the question.

$\endgroup$

Your Answer

By clicking “Post Your Answer”, you agree to our terms of service, privacy policy and cookie policy

Not the answer you're looking for? Browse other questions tagged or ask your own question.