Basic stats quiz question

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The question asks for the ‘sum’ which explains why they would be added. However why would this ever be done? I do not know why they would added because a mean return of 15% does not make any sense.

Maya has bought two stocks. The following data has been collected on these two securities:
Expected Return 6% 9%
Variance 9% 12%
Covariance (TCS, INFY) 0.2

What will be the mean and variance of the sum of the two stock’s expected returns and variances considering that the returns are independent.
Select one:
a. Mean = 7.5% and Variance= 0.4%
b. Mean = 7.5% and Variance = 10.5% Incorrect
c. Mean = 15% and Variance = 21%
d. Mean = 12% and Variance = 10.5%

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Posted by Paul (Questions: 11, Answers: 0)
Asked on February 15, 2016 2:18 am
Category: FRM Part I
Private answer

In the question above, the weights of the two securities in the portfolio seem to be missing. Assuming, 50-50 split for Infy and TCS, expected return will be 0.5*6% + 0.5*9% = 7.5%. and the variance would be around 8%. The options on these one do not seem correct for the variance part. It can’t be 0.4% and it can only be 10.5 if correlation is 1. The covariance seems incorrect at first glance as the correlation >1.

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Posted by rajatbatra (Questions: 0, Answers: 5)
Answered on February 20, 2016 8:53 pm
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