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Problem 1 Box method Assume you hold an equally weighted portfolio of N=100 stocks. (i.e. wi=N1=0.01 ). Variances of individual stock are the same and
Problem 1 Box method Assume you hold an equally weighted portfolio of N=100 stocks. (i.e. wi=N1=0.01 ). Variances of individual stock are the same and equal to 2=4. Assume all stocks are divided into two groups: group A stocks are from 1-50 and group B are from 51-100. Any pair of stocks from group A have pairwise covariances of 1 . Any pair of stocks from group B have covariance of 2 . Stocks from different groups are uncorrelated with each other. a) Find contribution to total variance of your equally weighted portfolio from stock variances b) Find contribution total variance of your equally weighted portfolio from stock covariances and calculate total variance of your portfolio
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