Question

Your client, Alex, has only two assets in his portfolio: assets A and B. Asset A had a standard deviation of 40%, and Asset B has a standard deviation of 20%. 50% of his portfolio is invested in Asset A, and 50% is invested in Asset B. The correlation for assets A and B is 0.90. What is the standard deviation of Alex s portfolio?

Answer 1

Answer:

Standard deviation of the portfolio = 70.71%

Explanation:

σP =√(w²A *σ²A) + (w²B*σ²B) +2 (wA*wB*correl. AB)

w = weight of..

Given that;

wA = 50% or 0.5 as a decimal

wB = 50% or 0.5

σA = 40% or 0.4

σB = 20% or 0.2

correl. = correlation = 0.90

σP = √(0.5² * 0.4² ) + (0.5² * 0.2² ) +(2*0.5*0.5*0.90)

σP = √ (0.04 + 0.01 + 0.45

= √0.5

= 0.7071

Standard deviation of the portfolio = 70.71%