Question

You are managing a $0.8 million portfolio which has a return of 14% and a variance of 0.16. The risk-free rate is 6%. If you receive $200,000 from an investor and want to invest the money in a stock (PFE) that has a return of 9% and a variance of 0.0625, what is the standard deviation of your $1 million portfolio? The correlation between your current portfolio and PFE is 0.7. A. 0.3289 B. 0.1273 C. 0.0389 D. 0.2405

Answer 1

Portfolio variance of $1 Mio Portfolio

Square of Weights A * Variance of Stock A + Square of Weights PPE * Variance of stock PPE + 2 * Weight A * Weight PPE * Stand Dev A * Stand Dev PPE * Correlation ABCD

= 0.80*0.80 * 0.16 + 0.20 * 0.20 * 0.0625 + 2 * 0.80 * 0.20 * 0.16 * 0.0625 * 0.7 * 0.3289 * 0.1273 * 0.0389 * 0.2405

= 0.1049

Hence standard devaition of $ 1 Mio Portfolio would be square root of portfolio varinace i.e square root of 0.1049 * 100

= 32.38%