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You have a two-stock portfolio. One stock has an expected return of 12% and a standard...

You have a two-stock portfolio. One stock has an expected return of 12% and a standard deviation of 24%. The other has an expected return of 8% and a standard deviation of 20%. You invested in these stocks equally (50% of your investment went toward each of the two stocks). If the two stocks are negatively correlated, which one of the following is the most feasible standard deviation of the portfolio?

  • 25%
  • 22%
  • 18%
  • not enough information to determine
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Homework Answers

Answer #1

The answer is 18%

Standard Deviation of a portfolio is lower than the weighted average Standard deviation when the correletion between stocks is less than +1

Since the stocks are negatively correlated, the standard deviation will be lower than the weighted average standard deviations

25% cannot be the answer as portfolio standard deviation cannot be higher than the individual stocks

22% is weighted average, It is not correct since the correlation is negative

18% is a feasible number and hence, the answer

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