Question

Consider an MNC that is exposed to the Taiwan dollar (TWD) and the Egyptian pound (EGP); 25 percent of the MNC's funds are Taiwan dollars and 75 percent are pounds. The standard deviation of exchange movements is 7 percent for Taiwan dollars and 5 percent for pounds. The correlation coefficient between movements in the value of the Taiwan dollar and the pound is .7. Based on this information, the standard deviation of this two-currency portfolio is approximately:

Answer 1

Answer:

The standard deviation of this two-currency portfolio is approximately is 5.13%

Explanation:

According to the given data, if we use the 2 asset portfolio standard deviation formula, we get the starndar deviation of portfolio, therefore, in order to calculate the the standard deviation of this two-currency portfolio we would have to calculate the following formula:

standard deviation of this two-currency portfolio= [(25%)2(7%)2 + (75%)2(5%)2 + 2*25%*7%*75%*5%*0.7]1/2 =

standard deviation of this two-currency portfolio=5.13%

The standard deviation of this two-currency portfolio is approximately is 5.13%