What is the standard deviation of a portfolio made up of 40% Stock A and 60% Stock B?
Stock |
Expected Return |
Beta |
Standard Deviation |
Correlation Coefficient ρ _{A,B} |
A |
14% |
1.5 |
0.36 |
0.9 |
B |
11% |
2.0 |
0.23 |
Standard deviation is 27.49%
Standard Deviation of portfolio | = | ((WA)^2*(SDA)^2+(WB)^2*(SDB)^2+2*WA*WB*SDA*SDB*CorrA,B)^(1/2) | ||||||
= | ((0.40)^2*(0.36)^2+(0.60)^2*(0.23)^2+2*0.40*0.60*0.36*0.23*0.9)^(1/2) | |||||||
= | 27.49% | |||||||
Where, | ||||||||
WA | = | Weight of Stock A | = | 0.40 | ||||
WB | = | Weight of Stock B | = | 0.60 | ||||
SDA | = | Standard deviation of Stock A | = | 0.36 | ||||
SDB | = | Standard deviation of Stock B | = | 0.23 | ||||
CorrA,B | = | Correlation coefficient of Stock A and Stock B | = | 0.9 | ||||
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