Answered: Stock Annual Return Covariance Allied…

MATLAB: An Introduction with Applications

6th Edition

ISBN:9781119256830

Author:Amos Gilat

Publisher:Amos Gilat

Chapter1: Starting With Matlab

Section: Chapter Questions

Problem 1P

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Question

An investment adviser is helping a couple plan a retirement portfolio. The adviser has recommended
three stocks—Allied Electronics, Bank United, and Consolidated Computers. Following
are the annual return and variance for each stock and the covariance between stocks: The couple wants a total portfolio return of at least .11. Determine the proportion of each stock
to include in the portfolio to minimize the overall risk

Stock
Annual Return
Covariance
Allied Electronics
.14
.10
Bank United
.10
.04
Consolidated Computers
.12
.08
Stock Combination (1, ſ)
Covariance
A, B
A, C
В. С
4
.7
.3

Definition Definition Measure of how two random variables change together. Covariance indicates the joint variability or the directional relationship between two variables. When two variables change in the same direction (i.e., if they either increase or decrease together), they have a positive covariance. When the change is in opposite directions (i.e., if one increases and the other decreases), the two variables have a a negative covariance.

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