Question

Suppose Wesley​ Publishing's stock has a volatility of

70 %, while Addison​ Printing's stock has a volatility of

25 %. If the correlation between these stocks is

10 %, what is the volatility of the following portfolios of Addison and​ Wesley:

a- 100% Addison

b. 75% Addison and 25% Wesley

c. 50% Addison and 50% Wesley

Round answers to two decimal places

Answer 1

a

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=1^2*0.25^2+0^2*0.7^2+2*1*0*0.25*0.7*0.1
Variance	0.0625
Standard deviation=	(variance)^0.5
Standard deviation=	25.00%

b

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.75^2*0.25^2+0.25^2*0.7^2+2*0.75*0.25*0.25*0.7*0.1
Variance	0.07234
Standard deviation=	(variance)^0.5
Standard deviation=	26.90%

c

Variance	=( w2A*σ2(RA) + w2B*σ2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*σ(RA)*σ(RB))
Variance	=0.5^2*0.25^2+0.5^2*0.7^2+2*0.5*0.5*0.25*0.7*0.1
Variance	0.14688
Standard deviation=	(variance)^0.5
Standard deviation=	38.32%