Sign up  |  Log in

Variance A + variance B and portfolio variance

 From Variance (A+B) = variance A + variance B + 2 covariance(x,y)

and the portfolio variance consisting of stock A and B equally weighted.

= weight2( variance A) + weight2(variance B) + 2 (weight A)(weight B)( covariance)

i try using the same number for both of the equation but doesn’t yield the same result. Are those two formula the same?

thank you

"Using Wiley for my CFA journey was by far the best option… I was able to pass on my first attempt.”– Moe E., Canada

In the first formula I presume that you mean:

Variance (A+B) = variance A + variance B + 2covariance(A,B)

In the second formula I presume that you mean:

Variance (A+B) = (weight A)2(variance A) + (weight B)2(variance B) + 2(weight A)(weight B)[covariance(A,B)]

The first formula is wrong, as it assumes that A has 100% weight and B has 100% weight.

Simplify the complicated side; don't complify the simplicated side.

Financial Exam Help 123: The place to get help for the CFA® exams
http://financialexamhelp123.com/