The market model offers a simple way to estimate the covariance between two assets, using the beta of each asset and the variance of the market return. Here, covariance is -51.84 = 0.8 × (-0.2) × 324. The variance of the new client portfolio is 200.59 = (0.9 × 0.9 × 16 × 16) + (0.1 × 0.1 × 16 × 16) + (2 × 0.9 × 0.1 × (-51.84)). The square root of the variance of the new client portfolio is approximately 14.2% |
