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Suppose Stock X offers the return of 15% with a standard deviation of 12%; Stock Y...

Suppose Stock X offers the return of 15% with a standard deviation of 12%; Stock Y offers the return of 24% with a standard deviation of 26%. These two stocks have the correlation coefficient of 0.2. If you invest 60% in stock X and the rest in Stock Y, what is your portfolio return? What is your portfolio standard deviation

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Answer #1

portfolio return = Respective Weights* Respective Returns

= 15% * 60% + 24% * (100% -60%)

= 9 % + 9.6%

= 18.60%

Hence the correct answer is 18.60%

The portfolio standard deviation = [{( standard deviation of Stock x ) ^ 2 * (Weight of Stock X) ^ 2 } + {( standard deviation of Stock Y ) ^ 2 * (Weight of Stock Y) ^ 2 } +{ 2 * ( standard deviation of Stock x ) * (Weight of Stock X) * ( standard deviation of Stock Y ) * (Weight of Stock Y) *  correlation coefficient }] ^ (1/2)

= (51.84 + 108.16+ 29.952) ^ (1/2)

= 13.78%

Hence the correct answer is 13.78%

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