Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr.

Sohail Zafar

Lecture 6 7
TOTAL RISK
Total risk of an investment, single stock or portfolio of stocks, is uncertainty
about its expected rate of return.

That means expected Kc for single stock

and expected Rp for portfolio of stocks is not necessarily going to be realized

at the end of the year. Actually realized Kc and Rp at the end of the year ( or
for any other holding period)

may turn out to be very different from the

returns expected a year ago when the respective share was bought or the
respective portfolio was constructed.

This possibility of expected ROR not

translating into actual ROR is called risk of investment.

Total Risk of Stand Alone Share
We know that Expected ROR per year on a stand-alone stock is:
Ri = expected dividend yield + expected capital gains yield; and it can be
written as:
Ri = (DPS1 / P0 ) + (P1 P0) / P0
Please note Ri instead of Kc is used here as symbol for stock returns.
Whereas i refers to any stock , so i

can refer to ICI, MCB, PSO , etc.

DPS1 refers to expected annual cash dividends per share during the next year,
P1 refers to expected share price after one year, and P o refers to current
market price of the share.
Total Risk is defined as uncertainty of ROR of a stock; and it is quantified as
variance of the stocks rate of return.

Although we are referring to the

uncertainty about next years ROR but in real life returns of past periods are
used to calculate variance of returns (total risk).

It means there is implicit

assumption that total risk calculated by using past data of returns is a good
estimate of total risk of the next year. Therefore using historic (past) data of
RORs you can calculate total risk of a share as variance of its rate of
return, and then find its under root to get standard deviation (SD) of returns.
The formula for variance of stock returns when using past returns data is:
Total Risk of Stock i = (VARi) =

( Rit Average Ri)2/ n .

In this formulation t refers to time period which can vary from time period 1
to time period n. Generally more observations of historical returns make this
calculation more valid, so instead of using last 5 years returns if you use last
10 years returns data then your VAR is more valid.

In practice, however,

usually monthly returns data for the last 60 months is used to calculate VAR of
returns of a stock. Under root of VAR of returns is standard deviation (SD) of
returns. If monthly returns data of last 60 months were used and the resulting

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

Standard Deviation (SD) is 3%, then to make it an annualized risk measure or

annualized SD multiply it by under-root of 12, so: 3% * 12 = 10.39% . The
annualized SD is calculated so that it is consistent with the expected returns
which are also per year; so that measures of both total risk and expected
returns are per year. The example given below uses only past 6 year returns
data to show you how to calculate total risk , as quantified by variance and
standard deviation of returns, for any stock.

Example :Calculating Total Risk of a Stock:

Suppose PSO stock in the last 6 years gave the following actual , or realized,
Kc : 40%, -11%, -5%, 3%, 24%, -9% . Please note actual ROR for each past
year was calculated as :
Realized R

PSO

= (actual DPS/P0 ) + (P1 - P0) /P0

( 0 refers to beginning of

year and 1 refers to end of year)

Let us find total risk of PSO stock as quantified by variance of its returns.
First step is to find average returns as: (40 + -11 + -5 + 3 + 24 + -9) / 6 = 7
Then find for each year, deviation from mean returns as: (actual R
average R

PSO

PSO

); and then square these deviations, as shown below. Then sum

these squared deviations and find their average by dividing by 6.

VAR

= [(40 - 7)

PSO

+ (-11 - 7)2 + (-5 - 7)2 + (3 - 7)2 + (24 - 7)2

+(-9 -7)2 ]/ (6).

=(1089

+ 324

144

16

289

+ 256) /6
=2118/6
= 353 %2 (note units are percentages squared)
SD

PSO

= VAR

PSO

= 353 %2
= 18.78 % (note units are percentage)
to find under root of 353 do this in FC 100: Hit green button COMPUTE
mode; enter 2; the hit shift key then x key, then enter 353, then
bracket close , then EXE. You get 18.78.
Please note you can do the same calculations variance (of total risk of stock
and SD of stock) returns, using your FC-100 as shown below.

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

Hit Green button STAT. You see a menu, choose first option, 1-VAR to

do calculations of one variable, and hit EXE key on bottom right, you see a
data entering screen with one column.
2

Now enter ROR data as: 40 EXE, -11 EXE, -5 EXE, 3 EXE, 24 EXE, -9

EXE.
3

Hit red button AC

Hit Shift button then STAT button. You see a menu

select option 5 for Var, you see another menu

select option 3 for standard deviation with n as denominator ,

and hit EXE

7

you see answer 18.78

This is SD of PSO returns and it is called total risk of PSO stock. You can find
variance of PSO returns by squaring this number because SD 2 = VARIANCE.
(18.78)2 = 353 . Using FC 100 you can find variance by : Compute mode;
enter 18.78, then black button with inverted v , then enter 2, then close
bracket, then EXE.

You get answer 353; it is variance .

And it is the same as

you found above by hand calculations except the rounding.

Total Risk of Portfolio of Stocks

Total risk of portfolio is variance of portfolio returns or its under-root that is SD
of portfolio returns.

Though Expected ROR of Portfolio (R p) is weighted

average of expected RORs of stocks included in the portfolio; but Variance of

portfolio (or SD of portfolio) is not weighted average of variances (or SD ) of
stocks in the portfolio;

because of presence of correlation (or covariance)

between the returns of stocks.

Expected rate of return on a portfolio is: Rp = Xi Ri
For a portfolio which has n stocks in it, this formula is opened as shown below
Rp = X1R1 + X2R2 + .+ XnRn
The Xs are weights of different stocks in the portfolio; and are called portfolio
weights.

Weight of a stock in a portfolio is proportion of your OE invested in

each stock, (amount invested in a stock / Your OE) and sum of weights of all
the securities in a portfolio is ALWAYS ONE. Note the mistake occurs when
weight of a stock is worked out as : investment in that stock divided by total
investment in the portfolio; because total investment in the portfolio may be
composed of some of your money (OE) and some of borrowed money. For
example weight of ICI stock in your portfolio is: X

54

ICI

= Rupee investment in

Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

ICI shares / your OE. And R 1, R2, till Rn are expected returns on stocks1, stock
2, and till stock n.
Total Risk of Portfolio is variance of its expected ROR and is denoted as
VARp here (or 2p is used as its symbol in most of the text books). Unlike
expected return of portfolio, total risk of portfolio is not weighted average of
total risk of stocks included in that portfolio. Total risk of portfolio is

not

= X1VAR1 + X2VAR2 + .+ XnRn

and the reason is the fact that variance of portfolio returns is influenced not
only by the variance of returns of constituent stocks but also by the
correlation (or covariance) between the returns of pairs of stocks. Therefore
total risk of portfolio as measured by variance of portfolio returns
VARp = Xi2 VARi + Xi XjCOVi,j

is:

( Stock i can not be Stock j).

(Equation one)
Since covariance of something with itself is called variance, therefore : COV
is VAR

i, i

. Now If we remove condition that stock i cannot be stock j, then

term Xi2 VARi is not needed because now VAR

in the above expression can

also be written as COVi ,i ; and the formula can be written as:

VARp = Xi Xj COV i,j
Since COV i,j =

(Stock i can be Stock j).

(Equation two)

CORRi,j SDi SDj therefore in the equation one, the second

term on the right hand side can be written as

VARp = Xi2 VARi + XiXj CORRi,j SDi SDj (stock i can not be stock
j)
Similarly equation two above can be written as
VARp

= Xi Xj CORRi,j SDi SDj

(Stock i can be Stock j)

These 4 formulations for total risk of portfolio are just different ways of saying
the same thing, that is, calculate covariance between all pairs of stocks and
multiply (weigh) each covariance with respective weight of those 2 stock in
the portfolio, and then sum all such weighted covariance. In the above
formulae some terms have double summation , such as, XiXj CORRi,j SDi
SDj , it is so because there is correlation between returns of stock i

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

and j

and between j and i ; so double summation says add these

terms twice.
Please note that:
SDp = VARp
CORRi,j = COVi , j / (SDi x SDj ).
Correlation of ROR between any two stocks can be between + 1 to -1 , but
Covariance between RORs of 2 stocks can be any number, small or large,
positive or negative.

Please remember covariance between returns of 2

stocks can be found if you know total risk of each stock (SD) and correlation
between returns of these 2 stocks, as shown below:
COV

i ,j

= CORR

i ,j

* SDi * SD

This is useful because your FC 100 in STAT mode calculates only correlation (
r) and SDs of 2 stocks; and from that output you can calculate covariance
between returns of 2 stocks as shown above.

Total Risk of Portfolio of 3 stocks

VARP formula has 2 terms in it: X i2 VARi and Xi Xj COVi, j (Stock i cannot
be Stock j). Since yours is a 3 stock portfolio therefore in the term X i2
VARi , i can vary from Stock 1 to Stock 3. Now opening this term for 3 stock
portfolio gives:
Xi2 VARi =

X12 VAR1 + X22 VAR2 + X23 VAR3.

The second term of the formula is:

+ X i Xj COVi, j (Stock i cannot be

Stock j). Opening the second term for three stock portfolio gives: + X i Xj
COVi, j =
+ X1X2Cov1, 2 + X1X3 Cov1,3

(stock 1 is i and stock 2 & 3 is j)

+ X2X1Cov2, 1 + X2X3 Cov2,3

(stock 2 is i and 1 & 3 are j)

+ X3X1Cov3, 1 + X3X2 Cov3,2

(stock 3 is i and 1 & 2 are j)

This process of opening the formula can be better visualized by a matrix

X1X1VAR1
X2X1COV

X1X2COV
2,1

X3X1COV3,1

X1X3COV

1,3

X2X2VAR2

X2X3COV

2,3

X3X2COV3,2

X3X3VAR3

1,2

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

1) Xi2 VARi = Sum of the boxes on the diagonal

2) XiXj Covi,j = Sum of all the off- Diagonal boxes. The double summation
sign, , means add twice because covariance between i and j

and

between j and i is same and therefore this number has to be added twice
because each box above the the diagonal has same data as a box below the
diagonal, e.g. Cov1,3 and Cov

3,1

are same amounts and this number appear

twice , once above the diagonal and once below the diagonal;therefore double
summation sign is used in the formula.

Please note that X1X1VAR1 can be

written as X1X1COV1,1; then the whole matrix is a matrix of covariance and the
restriction i can not be j is no more there. Then total risk of portfolio formula
can be written as :
VARp = Xi Xj COV i,j

(Stock i can be Stock j)

And that is just saying in mathematical notations that add all weighted
covariance in a matrix; for a 3-stock portfolio such a matrix has 9 boxes and
thus 9 covariance; for a 100-stock portfolio such a matrix has 10,000 boxes
and 10,000 covariance.
As COV

i,j

CORRi,j SDi SDj therefore it should be clear by now that if

correlations between returns of pairs of stocks is low then covariance between

those 2 stocks would be low, and to build low risk portfolio an investor
should include such stocks in her portfolio so that total risk for
portfolio is low.

Another way of building low risk portfolio is to give more

weights (Xs) in your portfolio to those stocks which have low or negative
correlation because doing so would also gives lower total risk of portfolio. One
important aspect of the job of security analysts is to identify pairs of stocks
whose returns have lower, or ideally negative, correlation.
Number of estimates needed to calculate Total Risk of Portfolio(VAR p)
From the above example of 3 stock portfolio, you need to estimate 3 VAR i for 3
stocks, and n(n - 1) = 3(3 - 1) = 6 COVs. Total estimates needed were: 3
variances + 6 covariances = 9, i.e. n2 =32 = 9. The total number of boxes in
a 3 x 3 matrix is 9.

You know COV i,j is same as COVj,i, therefore unique COVs

are: n(n - 1)/2= 3(3 - 1)/2= 6/2 =3. Total number of unique estimates needed
to estimate total risk of a 3-stock portfolio are: 3 variance + 3 covariance = 6
Similarly for 100- stock portfolio, to estimate its total risk (VAR p ) you need
estimates of 100 VARi of 100 stocks, and n(n - 1) = 100(100 - 1) = 9,900 COVs

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

between all pairs of stocks, and n(n - 1)/2 =100(100 - 1)/2= 9,900/2 = 4,950
unique COVs.
As a generalization, to estimate total risk of a portfolio,

total number of

unique estimates needed are n + n(n - 1)/2. That is n VARs for n stocks
in that portfolio; and n(n - 1) /2 unique COVs. For 100-stock portfolio, 100
variance of 100 stocks + 4,950 unique covariance between the pair of stocks,
and it adds up to total 5,050 unique estimates of variance and covariance of
returns that you need as inputs to estimate total risk of a 100-stock portfolio.
You can also estimate 4,950 correlations instead of covariance.
This sheer number of input estimates was daunting in 1950s when the Modern
Portfolio Theory (MPT) was presented by Markowitz, therefore in spite of the
elegance of the theory, practitioners could not apply it in real life.

By 1970s

two developments took place, first, the emergence of computers, and second
the simplifications proposed by Sharpe, Lintner, and Mossin that significantly
reduced the required number of input estimates for the calculation of total
risk of portfolio (VARp).

Thereafter Modern Portfolio Theory gained great

popularity among the practitioners since 1970s ; and a whole new industry
known by such titles as Money Management, Investment Management, Funds
Management, Mutual Funds , etc , took off; and now in USA individuals have
more of their savings invested through mutual funds than placed in bank
deposit accounts.

Exercise : Total Risk of a 3-stock portfolio:

Suppose you have built a 3-stock portfolio, the weights and covariance of
returns are given below, please estimate total risk of this portfolio.
X1 = 0. 2325 (23.25% of your own fund ,OE, invested in stock 1)
X2 = 0.4070
X3 = 0.3605
Sum of Xi = 0.2325 + 0.4070 + 0.3605 = 1
Covariance estimates between returns of pairs of stocks are estimated by
security analysts as shown below:

1
2
3

COVs

146
187
145

187
854
104

145
104
289

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

Solution: total risk of portfolio, VARp

X1

X2

X3

X
1

0.2325x0.23235 x146 = 7.9

.23 0.2325x0.407x187 = 17.7

0.2325x0.3605x145
= 12.15

X
2

0.407x0.23235 x187 = 17.7

0.407x0.407x 854= 141.46

0.407x0.3605x104
= 15.25

X
3

0.3605x0.23235x145=12.15

0.3605x0.407x104=15.25

0.3605x0.3605x289
= 37.55

Total risk of portfolio ,VAR P , is sum of the data of all the 9 boxes in the above
matrix

VAR

= 7.9 + 17.7 + 12.15 + 17.7 + 141.46 + 15.25 + 12.15 + 15.25 +

37.55
VAR

= 277.10%

SDp =

VARp
277.1%2

SDp =
SDp

16.46%

You must have noticed that certain numbers are appearing twice in the above
matrix; these are the terms for which double summation sign was used.
Therefore a simpler way of writing this variance formula for a 3-stock portfolio
is:
VARp = X12VAR1 + X22VAR2 + X32VAR3 +
X1X3COV

1,3

VARp = 7.9

) + 2(X2X3COV
+ 141.6

2(X1X2COV

1,2

2(

2,3

+ 37.55

2(17.7)

2(12.15)

+ 2(15.25)
VARp = 277.1
Whereas 1, 2 and 3 are different stocks such as ICI, UBL, and PSO. Similarly
for portfolios made up of more than 3 stocks you can extend the above
formula.

Exercise: Total Risk of portfolio if correlation (instead of Covariance)

are given between returns of stocks

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

Estimates for total risk (standard deviation of RORs) and correlation of RORs of
3 stocks, A, B, and C, have been provided by your staff of security analysts.
And you, as portfolio manager, have decided to build the portfolio whose
weights (Xs) are:
XA = 0.20 , i.e. you have invested 20% of your OE in stock A.
XB = 0
XC = 0.80

Correlations between pairs of stocks RORs

Stock

S.D

12%

15%

10%

A
B
C

1
-1
0.2

1
-0.2

Please note correlation of something with itself is always one.

Questions:
Find total risk of portfolio, SD

Solution
You may choose to use data of Correlations and SDs, or you may first convert
correlations into covariance. Let us find COVs first, Note COV

i,i

= VARi , and

variance is square of standard deviation which is given in this case.

CovA,A = CorrA,A SDA SDA

CovA,B = CorrA,B SDA SDB

= 1 X 12 X 12

= -1 X 12 X 15
= 44%

= -180%2

CovB,B = CorrB,B SDB SDB

CovA,C = CorrA,C SDA SDC

= 1 X 15 X 15

= 0.2 X 12 X 10
= 225%

CovC,C = CorrC,C SDC SDC

= 1 X 10 X 10
=

= 24%2
CovB,C = CorrB,C SDB SDC
= -0.2 X 15 X 10

=100%2

= 30%

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

Note: Since weight of stock B is zero, so you used only Stocks A & C to build
this portfolio, Stock B is not in your portfolio, it is a 2- stock portfolio, its VAR p
formula in matrix form would have only 4 boxes
Xa Xa COVa,a

Xa Xc COV

Xc Xa COV

c,a

Xc Xc COV

As COV

= VAR a, therefore the above matrix can be be written as follows

a,a

Xa Xa VARa
Xc Xa COV

Xa Xc COV
c,a

a,c
c,c

a,c

Xc Xc VAR,c

Please note that on the diagonal are variances and off-diagonal terms are
covariance. You can write it in a equation format:
VARp

= X2a VARa + Xc2VARc + XaXcCOVa,c + XcXa COVc,a

Let us take note of the fact that COV

a, c

= COV

c,a

, so instead of writing it

twice, let us write it once and multiply it with 2.

VARp

= X2a VARa + Xc2VARc + 2(XaXcCOVa,c)

= (0.2)2144 + (0.8)2100 + 2(0.2 x 0.8 x 24)
= 5.76 + 64 + 2(5.76)
= 81.28%2

SDp

= 81.28
= 9%

Similarly for a 3-stock portfolio you can write formula of total risk as :
VARp

= X 2a VARa

+ Xb2VARb + Xc2VARc + 2(XaXbCOVa,b) +

2(XaXcCOVa,c) + 2(XbXcCOVb,c)

Calculating Covariance and Correlation between returns

of Pairs of Stocks
Let us now learn to calculate covariance and correlation between returns of 2
stocks. In doing so you would also learn to calculate total risk (variance of
returns) of individual stocks as well. You will do it by hand as well as by using
FC-100 calculator.

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

Exercise : estimating total risk of 2 stocks, and covariance and

correlation of their returns
Data
Years

RICI

RPSO

1999

10%

-5%

2000

-5%

7%

2001

20%

2%

2002

15%

4%

Find
1) Total Risk of ICI Stock, i.e. VARICI & SDICI
2) Total Risk of PSO Stock, i.e., VARPSO & SDPSO
3) COV

ICI,PSO

4) CORR

ICI, PSO

Please note that in real life, security analysts use monthly returns of last 60
months as data set to estimate correlation (or covariance) between returns of
any 2 stocks. Here a shorter and annual return data set is used to save time.
These annual realized returns were calculated as:
[DPS / P

begin

] + [(P

end

- P

begin

) / P

begin

]; that is realized dividend yield plus

realized capital gains in each of the past 4 year.

Solution:
1) Avg RICI = (10 5 + 20 + 15) / 4 = 40/4 = 10%
Avg RPSO = (-5 +7 + 2 + 4) / 4 = 8/4 = 2%

Total Risk of ICI Stock is variance of its ROR denoted as VAR

ICI

VARICI = [(R99 - RAvg )2 + (R2000 - RAvg )2 + (R2001 - RAvg )2 + (R2002 - RAvg )2 ]/n
= {(10-10)2 + (-5-10)2+ (20-10)2 + (15-5)2 }/ 4
= {0 + 225 + 100 + 25} / 4
= 87.5%2
SDICI = 87.5%2

= 9.35%

We are using mean returns of ICI as proxy for the expected returns i.e. Avg R ICI
is a proxy for expected ROR of ICI stock, so one degree of freedom is lost and
therefore denominator should be n 1 if it is sample data; and n should be
denominator if it is population data. As for these years from 1999 to 2002 the
returns are not sample but actual returns in these years earned by the
shareholders of these two stocks so it is population data, and n is used as

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

denominator; which is 4 in this case as we are using data of 4 years or in

other words, we have 4 observations and there are only 4 observations in
these 4 years for any stock so it is population data.
2) Total Risk of PSO Stock is variance of its ROR denoted as VAR
2

PSO

VARPSO = {(-5-2) + (7-2) + (2-2) + (4-2) }/ 4

= {49 + 25 + 0 + 4} / 4
= 78 / 4 = 19.5%2
SDPSO

= 19.5%

=4.41%
COVICI, PSO = [(R ICI99-R ICIAvg )(R PSO99 - R PSOAvg) + (R ICI2000 R ICIAvg)(R PSO2000
- R PSOAvg) +
(R ICI 2001 R ICIAvg )(R PSO2001 R PSOAvg) + (R ICI2002 R ICIAvg)(R PSO2002
R PSOAvg )] / n
COVICI, PSO = [(10-10)(-5-2) + (-5-10)(7-2) + (20-10)(2-2) + (15-10)(4-2)] / 4
COVICI, PSO = (0-75+0+10)/4
= -65/4
= -16.25%2
Many text books use returns data in decimal format, that is, 12% is written as
0.12.

Here it is deliberately avoided to keep the appearance of numbers

simpler and easy to read.

Please note that 2 estimated numbers, that is,

expected ROR of ICI and PSO were not available and means were used as
proxy for those, therefore 2 degrees of freedom are lost and denominator of
formula is n 2; but we have used n as denominator, that implies it was
assumed that the data was population data, not the sample data.
COV of returns of 2 stocks can be a positive or negative number, it can be a
small or a large number, and its units are percentages squared which is
something

not

easily

conceptualized,

therefore

it

is

standardized

as

Correlation, i.e. CORRICI, PSO, and it is calculated as:

CORR

ICI, PSO

= COV

ICI, PSO

/ (SDICI x SDPSO )

= - 16.25 /( 9.35 x 4.41) = - 0.39.

Note: Correlation between returns of 2 stocks can take values only between
+1 to -1. Correlation value of +1 means perfect positive correlation and -1
means perfect negative correlation.
change.

Correlation is a measure of direction of

In this example correlation of -0.39 means if 100 observations of

returns of these 2 stocks are taken for the last 100 years, then in 39 years

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Investment Analysis & Portfolio Management. MBA II. Spring 2015. Lahore School of Economics. Dr. Sohail Zafar

when returns of ICI stock were going up compared to its last years returns,
the returns of PSO stock were going down compared to its last year returns.
You can find correlation and then covariance between returns of 2
stocks using FC 100 calculator as shown below:
1. Green button STAT; on the menu choose item A + BX to do
calculations of 2 variables, and then hit EXE
2. On the data entering screen you see 2 columns X and Y. Enter returns
of ICI in column X and returns of PSO in column Y.
3. Hit red button AC
4. Hit SHIFT and STAT buttons, you will see a menu, choose item 7
regression
5. On the new menu choose item 3, r for correlation; and EXE. You see
-0.39. This is correlation of returns between ICI and PSO stocks as you
calculated by hand earlier.
6. To find Covariance of returns of ICI and PSO you need the SD of the 2
stocks.

Hit SHIFT and STAT again, from the menu choose item 5

Var . On the next menu choose item 3 and EXE ; you get 9.35, it is
7.

SD of ICI.
Again hit SHIFT and STAT and choose item 5, and on the next

menu choose item 6, and EXE ; you get 4.41, it is SD of PSO.

8. Now you have all the data for calculating covariance between ICI and
9.
10.

PSO stock returns as : covariance = correlation * SD ICI * SD PSO

covariance = -0.39 * 9.35 * 4.41
covariance
= -16.22
and it is same as you calculated above by hand, apart from rounding
difference.

Please note the skill to use calculator for calculating total risk of a stock and
correlation between returns of any pair of stocks is a must learning for you
in this course, and a clear understanding of their meanings is also essential.
Also notice that correlation of returns of any 2 stock is not in percentages or
any other units of measurement, it is just a number; while covariance is
percentages squared.

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