Question

Given the information in the table below, an equally weighted portfolio of stocks A, B, and...

Given the information in the table below, an equally weighted portfolio of stocks A, B, and C has a standard deviation equal to 7%  

Stock

Expected Return

Standard Deviation

Correlation with A

Correlation with B

Correlation with C

A

10%

7%

1

B

10%

7%

0

1

C

10%

7%

0

0

1

Statement: An equally weighted portfolio of stocks A, B, and C has a standard deviation equal to 7%. (True or False ? Explain if True or False)

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Answer #1

In order to assess the statement true or false, we need to calculate the standard deviation of portfolio with 3 equally weighted stocks

Mathematically, it is represented as:

Given the information above,

Std deviation = 7%

Hence, the statement is TRUE

Although portfolio should ideally has a lower standard deviation than individual stocks in portfolio, however, in this case. All stocks are equally weighted, have same standard deviation and are perfectly positively correlated. It is as good as Stock A, Stock B and Stock C are same. Hence the standard deviation of a portfolio of these 2 stocks is as good as the inidvidual stocks themselves.

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