Question

You are creating a portfolio of two stocks. The first one has a standard deviation of...

You are creating a portfolio of two stocks. The first one has a standard deviation of 28% and the second one has a standard deviation of 40%. The correlation coefficient between the returns of the two is 0.3. You will invest 50% of the portfolio in the first stock and the rest in the second stock. What will be the standard deviation of this portfolio's returns? Answer in percent, rounded to two decimal places (e.g., 4.32%=4.32).

Homework Answers

Answer #1

standard deviation for a two-asset portfolio σp = (w12σ12 + w22σ22 + 2w1w2Cov1,2)1/2

where σp = standard deviation of the portfolio

w1 = weight of Asset 1

w2 = weight of Asset 2

σ1 = standard deviation of Asset 1

σ2 = standard deviation of Asset 2

Cov1,2 = covariance of returns between Asset 1 and Asset 2

Cov1,2 = ρ1,2 * σ1 * σ2, where ρ1,2 = correlation of returns between Asset 1 and Asset 2

standard deviation = ((0.502 * 0.282) + (0.502 * 0.402) + (2 * 0.50 * 0.50 * 0.3 * 0.28 * 0.40))1/2

standard deviation of portfolio = 27.64%

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