Question

Consider the following expected returns, volatilities, and correlations:

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

You create a 2 stock portfolio with $1,000,000. If you invest $600,000 in Walmart and the rest in Microsoft, what is the standard deviation of your portfolio?

Group of answer choices

16.60%

18.75%

31.4%

2.76%

Answer 1

(WM,MS) = [{w(WM) * (WM)}² + {w(MS) * (MS)}² + {2 * w(WM) * w(MS) * (WM) * (MS) * Correlation(WM,MS)}]^1/2

= [{(6/10) * 0.14}² + {(4/10) * 0.24}² + {2 * (6/10) * (4/10) * 0.14 * 0.24 * 0.7}]^1/2

= [0.0071 + 0.0092 + 0.0113]^1/2

= [0.0276]^1/2

= 0.1660, or 16.60%

So, 1st option is correct.