Question

Use the table for the question(s) below.

Consider the following expected returns, volatilities, and correlations:

Stock	Expected Return	Standard Deviation	Correlation with Duke Energy	Correlation with Microsoft	Correlation with Wal-Mart
Duke Energy	14%	6%	1.0	-1.0	0.0
Microsoft	44%	24%	-1.0	1.0	0.7
Wal-Mart	23%	14%	0.0	0.7	1.0

The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:

		a. 11%
		b. 8%
		c. 6%
		d. 9%

Answer 1

Portfolio Standard Deviation = [(WA*SDA)^2 + (WB*SDB)^2 + (2*WA*WB*SDA*SDB*CorAB)]

where

WA - Weight of Duke Energy stock =.5

WB - Weight of Microsoft stock =.5

SDA - Standard Deviation of Duke Energy stock = 6%

SDB - Standard Deviation of Microsoft stock = 24%

CorAB - Correlation coefficient = -1

Portfolio Standard Deviation = [(.5*6)^2 + (.5*24)^2 + (2*.5*.5*6*24*-1)]

= [9 + 144 -72]

= 81

= 9%