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?
The portfolio return = Stock X Return * Stock X Weight + ( Stock Y Return * Stock Y Weight)
= 15% * 60% + 24% * 40%
= 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)
= [( 144* 0.36) + ( 676 *0.16) + 2* ( 12 * 0.60) * ( 26 * 0.40) * 0.2 ] ^ (1/2)
= [51.84 + 108.16 + 29.952] ^ ( 1/2)
= 13.78%
Hence the correct answer is 13.78%
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