Question

Stock X and Stock Y have a correlation coefficient of .5. Stock X has an expected return of 10% and a standard deviation of 10%. Stock Y has an expected return of 14% and a standard deviation of 21%. What is the portfolio standard deviation if 60% of your wealth is invested in Stock X and 40% in Stock Y

Answer 1

Answer:

12.53%

Explanation:

Since there are only two assets in the portfolio, its standard deviation can be determined using the two-asset portfolio standard deviation provided below;

σP = (wA2 * σA2 + wB2 * σB2 + 2 * wA * wB * σA * σB * ρAB)^(1/2)

wA=proportion of the portfolio invested in X=60%

σA=standard deviation of return on X= 10%

wB=proportion of the portfolio invested in Y=40%

σB=standard deviation of return on Y =21%

ρAB= correlation between X and Y=.5

σP=(60%^2*10%^2+40%^2*21%^2+2*60%*40%*10%*21%*.5)^(1/2)

σP=12.53%