Answer:
None of the options are correct.
The correct answer lies between 2 percent through to 15.6 percent.
Explanation:
We have been given enough data or parameters or information which is going to help in solving the problem effectively and efficiently;
So, we have the following main points from the question/problem given above:
=> " One stock has an expected return
= 12% and a standard deviation of 24%."
=> The other has an expected return of 8% and a standard deviation of 20%."
=> "50% of your investment went toward each of the two stocks."
=> "If the two stocks are negatively correlated"
Hence, the most feasible standard deviation of the portfolio can be calculated as below:
(1). For stock portfolio One , we have
(0.5 × 20/100 )
(2). For stock polio two, we have;
( 0.5 × 24/100)
(3). 2 × 0 5 × (20/100) × 0.5 × (24/100) × correlation.
Now, take the square of (1) and (2) above and then the square root of (1), (2) and (3); and add (1), (2) and (3) together to give the standard deviation;
√[0.0244 + 0.024 × b]. ---------------------------(****).
Where b = correlation.
NOTE : "We are to assume that stocks are negatively correlated, thus, the correlation, bvalue between -1 and 0.
Thus, slotting in the correlation values into equation (****).
=> So, between 2 percent through to 15.6 percent.
