Question

Suppose Wesley? Publishing's stock has a volatility of 45%?, while Addison? Printing's stock has a volatility of 25%. If the correlation between these stocks is 30%?, 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

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

a. 100% Addison

Volatility = 25%

b. 75% Addison and 25% Wesley

Volatility = Sqrt(weight of wesley^2*Volatility of wesley^2 +  weight of Addison^2*Volatility of Addison^2 + 2 * weight of Addison * weight of Wesley * Correlation * volatility of wesley * volatility of Addison)

Volatility = Sqrt(0.25^2*0.45^2 +  0.75^2*0.25^2 + 2 * 0.75 * 0.25 * 0.45 * 0.25 * 0.30)

Volatility = Sqrt(6.05%)

Volatility = 24.59%

c. 50% Addison and 50% Wesley.

Volatility = Sqrt(weight of wesley^2*Volatility of wesley^2 +  weight of Addison^2*Volatility of Addison^2 + 2 * weight of Addison * weight of Wesley * Correlation * volatility of wesley * volatility of Addison)

Volatility = Sqrt(0.50^2*0.45^2 +  0.50^2*0.25^2 + 2 * 0.50 * 0.50 * 0.45 * 0.25 * 0.30)

Volatility = Sqrt(8.31%)

Volatility = 28.83%