Answer:
Calculate the Covariance of both stock A and B
[tex]Covariance_{AB}[/tex] = [tex]Correlation_{AB}[/tex] × ∝A × ∝B
[tex]Covariance_{AB}[/tex] = 0.35 × 0.24 × 0.14
[tex]Covariance_{AB}[/tex] = 0.01176
Therefore, the Covariance of AB is 0.01176.
Calculate the proportion of investment in stock – A
Proportion of A = \frac{∝_{B}^{2} - Covariance_{AB} }{∝_{A}^{2} + ∝_{B}^{2} - (2 Covariance_{AB}) }
Proportion of A = \frac{0.14^{2} - 0.01176 }{0.24^{2} + 0.14^{2} - (2 * 0.01176)}
Proportion of A = 0.1461 or 14.61%
Therefore, the proportion of investment in stock – A is 14.61%
Calculate the proportion of investment in stock – B
Proportion of B = 1 – Proportion of A
Proportion of B = 1 – 0.1461
Proportion of B = 0.8539 or 85.39%
Therefore, the proportion of investment in the stock – B is 85.39%
