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Your portfolio of investment is: 20% stock A and 80% stock B. The portfolio variance of return is 0.0445
Portfolio variance is a risk assessment that describes how the aggregate actual returns of a portfolio's assets fluctuate over time.
Formula for the portfolio variance is:
Portfolio variance = w₁²σ₁² + w₂²σ₂² + 2w₁w₂Cov₁₂
Where:
w = weight of each asset
σ = standard deviation or volatility of each asset
Cov₁₂ = covariance between two assets.
Cov₁₂ = σ₁σ₂ x Corr₁₂
Parameters given in the problem:
w₁ = 20%
w₂ = 80%
σ₁ = 15%
σ₂ = 25%
Corr₁₂ = 0.3
Compute the covariance:
Cov₁₂ = 15% x 25% x 0.3 = 0.01125
Hence,
Portfolio variance = 0.2² x 0.15² + 0.8² x 0.25² + 2 x 0.2 x 0.8 x 0.01125
= 0.0445
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