Suppose You Own a Two-Security Portfolio

question 92

Multiple Choice

Suppose you own a two-security portfolio.You have 25 percent of your funds invested in Security A and the balance of your funds invested in Security B.Security A has a standard deviation of 8 percent and Security B has a standard deviation of 12 percent.What is the covariance of the returns on Securities A and B if the portfolio standard deviation is 10 percent?

• A) 0.0040
• B) 0.0093
• C) 0.0147
• D) 0.0258

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Definitions:

Bond Discount Amortization

The process of systematically reducing the discount amount on a bond over its life, leading to an increase in its book value to the par value at maturity.

Market Rate Of Interest

The prevailing rate of interest determined by supply and demand in the credit market, often used as a benchmark in financial transactions.

Noncurrent Monetary Liabilities

Long-term financial obligations that are not due within the next 12 months, such as bonds payable or long-term loans.

Present Value

The current value of future money or cash flows, determined by applying a specific rate of return.