Study plan
Study Outline: Covariance Workbook from Scenario Inputs to Portfolio Output Interpretation
Study the covariance workbook by progressing from scenario data and individual stock measures to interpreting the reported portfolio covariance, correlation, return, and risk outputs.
Lessons in this plan
-
1
Read the workbook structure and scenario data
Identify the worksheet sections, the three states of the economy, their probabilities, and the stock return inputs for Stocks A through F so you can trace every later output back to the original scenario table.
- 2 Study expected returns for the six individual stocks Use the reported expected return section to connect each stock’s scenario returns and probabilities to its listed expected return for Stocks A, B, C, D, E, and F.
- 3 Study standard deviations as individual stock risk measures Review the listed standard deviations for Stocks A through F and interpret them as the workbook’s individual risk outputs before moving to portfolio-level measures.
- 4 Interpret the Portfolio AB output block Read the Portfolio AB section and explain what the 50%/50% weights, covariance, correlation, expected portfolio return, and portfolio standard deviation say about combining Stocks A and B.
- 5 Interpret the Portfolio CD output block Read the Portfolio CD section and explain what the 50%/50% weights, covariance, correlation, expected portfolio return, and portfolio standard deviation say about combining Stocks C and D.
- 6 Interpret the Portfolio EF output block Read the Portfolio EF section and explain what the 50%/50% weights, covariance, correlation, expected portfolio return, and portfolio standard deviation say about combining Stocks E and F.
- 7 Compare the three portfolios across covariance, correlation, return, and risk Compare AB, CD, and EF using the reported covariance, correlation, expected return, and standard deviation outputs to summarize how the workbook presents differences across the three two-stock portfolios.