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Calculate the total variance of return on shares a and b

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An investor has chosen to invest in two shares A and B. These shares have an idiosyncratic (diversifiable) variance given by ??(????) = 1.5 and ??(????) = 2.1 as well as a systematic risk that can be described by a beta value of ???? = 0.7 and ???? = 1.2. In addition to the individual variance of the shares, the variance on the market return is ??(??????) = 36.0. Assume further that all the prerequisites for CAPM are valid.

1. Calculate the total variance (total risk) of the return on shares A and B

2. Find the total variance for a portfolio containing both shares A and B, and where share A constitutes a share of 130% of the portfolio and where the unsystematic risk on the portfolio is given by ??????,?? = 2.72.

Reference no: EM133111593

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