2.00. QUESTION 31 Your client\'s investment policy s-atement indicates that the

Question

2.00. QUESTION 31 Your client's investment policy s-atement indicates that the investment portfolio must be restricted to no more than 6 asset classes. You decide to estimate all the necessary variances and covariances to calculate the variance of the portfolio that contains all six asset classes. What is the total number of terms in the expression for the variance of a 6-asset portfolio? 6. O 12 O 18 36 QUESTION 32 A portfolio manager is interested in constructing a portfolio using three asset classes: U.S. stocks, US bonds, and foreign stocks. The research team estimates the following inputs for calculating the expected retum and variance of the three asset portfolio. The team also forecasts the expected returm and the standard deviation of the Morgan EAFE index (Europe, Australia, Far East) as a proxy for the market portfolio Stanley

Explanation / Answer

Total number of terms in the expression for the variance of a n-asset portfolio = n^2

Therefore total number of terms in the expression for the variance of a 6-asset portfolio = 6^2 =36

Therefore correct answer is option: 36

Out of these 36 terms in the expression for the variance of a 6-asset portfolio, 6 terms (n terms) are weighted variance terms which are specific to each stock. Remaining 30 terms (36-6=30) are weighted co-variance terms, representative of the macro forces that are common for all companies.

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