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  3. he standard deviations of shares a, b and c are 20

he standard deviations of shares A, B and C are 20%, 15% and 30%, respectively....

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Finance

he standard deviations of shares A, B and C are 20%, 15% and 30%, respectively. You want to make a portfolio combining these three shares. The correlation matrix of these three shares is as follows:

Share

A

B

C

A

1.0

-0.6

0.1

B

-0.6

1.0

0.6

C

0.1

0.6

1.0

You have $1 million to invest in these three shares in the following proportions:

Share

Weights

A

0.30

B

0.20

C

0.50

Using the above data, answer the following questions:

  1. Calculate the covariance matrix for the three shares
  2. Estimate the contribution of each share to the portfolio variance
  3. Calculate the percentage contribution from each share to the portfolio variance
  4. If you want to reduce the portfolio variance which share would you replace with a share that has a lower contribution.

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