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Emmy is analyzing a two-stock portfolio that consists of a utility stock and a commodity stock. She knows that the return on the utility stock has a standard deviation of 40 percent and the return on the commodity stock has a standard deviation of 30 percent. However, she does not know the exact covariance in the returns of the two stocks. Emmy would like to plot the variance of the portfolio for each of three cases—covariance of 0.020, 0, and –0.020—in order to understand what the variance of the portfolio would be for a range of covariances. Do the calculation for all three cases (0.020, 0, and -0.020), assuming an equal proportion of each stock in the portfolio.
a. Case 1, s1,2 = 0.020: (Round answer to 4 decimal places, e.g. 0.0768.)
Variance:
b. Case 2, s1,2 = 0.0: (Round answer to 4 decimal places, e.g. 0.0768.)
Variance:
c. Case 3, s1,2 = -0.020: (Round answer to 4 decimal places, e.g. 0.0768.)
Variance:
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