Question

Suppose Wesley​ Publishing's stock has a volatility of

65%​,

while Addison​ Printing's stock has a volatility of

20%.

If the correlation between these stocks is

45%​,

what is the volatility of the following portfolios of Addison and​ Wesley:

a.

100%

Addison

b.

75%

Addison and

25%

Wesley

c.

50%

Addison and

50%

Wesley

Answer 1

a

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=1^2*0.65^2+0^2*0.2^2+2*1*0*0.65*0.2*0.45
Variance	0.4225
Standard deviation=	(variance)^0.5
Standard deviation=	65%

b

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.75^2*0.65^2+0.25^2*0.2^2+2*0.75*0.25*0.65*0.2*0.45
Variance	0.26209
Standard deviation=	(variance)^0.5
Standard deviation=	51%

c

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.5^2*0.65^2+0.5^2*0.2^2+2*0.5*0.5*0.65*0.2*0.45
Variance	0.14488
Standard deviation=	(variance)^0.5
Standard deviation=	38%