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Use the following information to calculate the percentage standard deviation of a portfolio that is 42.8...

Use the following information to calculate the percentage standard deviation of a portfolio that is 42.8 percent invested in 3 Doors, Inc., and the rest invested in Down Co.:

3 Dorrs, Inc. Down Co.
Expected return 21% 13%
Standard deviation 50 35
Correlation 0.43
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Answer #1

Let .......... S1 = Standard deviation of 3 Dorrs Inc = 50 and W1 = Weight = 0.428

S2 = Standard deviation of Down Co = 35 and W2 = Weight of Down Co = ( 1 - 0.428) = 0.572

r12 = Correlation between two stocks = 0.43

Standard deviation of a portfolio is given by

= Square root over [ (W1)2 * (S1)2 + (W2)2 * (S2)2 + 2 * W1*W2*r12*S1*S2 ]

= Square root over [ (0.428)2 * (50)2 + (0.572)2 * (35)2 + 2 * (0.428) * (0.572) * (0.43) * (50) * (35) ]

= Square root over [1227.21 ]

= 35.03 % ............is the percentage standard deviation of portfolio.

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