Question

Calculate portfolio standard deviation for the following two stock portfolio where:

Weight in stock A is 40%

std deviation of Stock A is 8.44%

std deviation of Stock B is 9.69%

covariance between Stock A and Stock B is -0.00796.

Answer 1

given about a portfolio of two stock,

Weight in stock A Wa = 40%

std deviation of Stock A SDa = 8.44%

std deviation of Stock B SDb = 9.69%

covariance between Stock A and Stock B Cov(a,b) = -0.00796

So, weight in stock B, Wb = 1 - Wa = 1-0.4 = 0.6 or 60%

Standard deviation of the portfolio is

SDp = SQRT(((Wa*SDa)^2) + ((Wb*SDb)^2) + 2*Wa*Wb*Cov(a,b))

=> Standard deviation of portfolio SDp = SQRT(((0.4*0.0844)^2) + ((0.6*0.0969)^2) + 2*0.4*0.6*(-0.00796)) = 0.0264 or 2.64%

So, portfolio standard deviation = 2.64%