Covariance matrix

[Submariner]

We are given Stock S and put option O on stock S. The corresponding weights for these assets are Ws=90% and Wo=10%. Using the following covariance matrix, calculate the variance of the return for the portfolio.
Returns Rs Ro
Rs 0.0011 -0.0036
Ro -0.0036 0.0011
Variance(Rp) = weight(x)^2 * variance(return X) + weight^2 * variance(return Y) + 2*weight(x)*weight*covariance
So, given the above I get:
(90%)^2 * (0.0011) + (10%)^2 * (0.016) + 2*(90%)*(10%) and for covariance I get (0.0011)^.5 * (0.016)^.5 * (-0.0036) = -0.00002
However, the book says I input -0.0036 for covariance yet in a similar problem (one with three assets, not two) we computed variance by SD(asset 1) * SD(asset 2) * the returns correlation between the two.
Why do I not do that here?
Thanks.


I computed covariance by getting the SD of (Rs) and (Ro) then multiplying by the correlation of (Rs and Ro) of -0.0036 .03317 * .12649 * -0.0036 = -0.00002.

 

[breadmaker]

For a given covariance matrix, the entries on the main diagonal are the variances, while those off the main diagonal are the covariances. Your formula is correct and just needs a plug ‘n chug.
Q: is Var(Ro) 0.0011 or 0.016?

 

[AnalystofThings]

For this problem, you dont need to calculate covariance. Covariance is given to you in the matrix.
Regarding the formula you gave, Covariance(X,Y) = var(X)*var(Y)*Corr(X,Y)

 

[S2000magician]

AnalystofThings wrote:For this problem, you dont need to calculate covariance. Covariance is given to you in the matrix.
Regarding the formula you gave, Covariance(X,Y) = var(X)*var(Y)*Corr(X,Y)

Whoops!
Covariance(X,Y) = std dev(X) × std dev(Y) × Corr(X,Y)