This is from the Qbank regarding calculation of portfolio variance. I am confused as to why they used they calculated the way they did. Company A STDEV 60% Company B STDEV 30% Weight is 50% each Covariance is 576 The way the answer calculated it is as follows portfolio variance = (0.5 x 0.5)(60 x 60) + (0.5 x 0.5)( 30 x 30) + 2 x 0.5x 0.5 x 576) = 1413 The answer would be very different if you calculated using the stdev in decimal form. Now… shouldn’t the 60% and 30% be in decimal form? But then the covariance should also be in… decimal form? What am I missing here?
I remember that the covariance range from -infinity to +infinity; thus I think the answer is fine. The covariance is not measured in %, how could you change it into decimal form?
Ah, right. I forgot about the infinit part. Ok, so covariance is where its at. But why did the answer calculated the STDEV as percentage rather than in decimal form? As if you calc’d using decimal form, you get a completely different answer (and your answer wouldn’t even be in the choices … at least for this question from the Qbank).