Question

What is the standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 18%. Stock B has a standard deviation of 14%. The portfolio contains 40% of stock A, and the correlation coefficient between the two stocks is -.23.

9.7%

12.2%

14%

15.6%

Answer 1

Standard Deviation of Stock A = 18%

Standard Deviation of Stock B = 14%

Weight of Stock A = 40%

Weight of Stock B = 60%

Standard Deviation of Portfolio² = (0.4² * 0.18² + 0.6² * 0.14² + 2 * 0.4 * 0.6 * 0.18 * 0.14 * -0.23)

Standard Deviation of Portfolio² = (0.005184 + 0.007056 - 0.002782)

Standard Deviation of Portfolio² = (0.009458)

Standard Deviation of Portfolio = (0.009458)^0.5

Standard Deviation of Portfolio = 9.73%

Standard Deviation of Portfolio = 9.7%