Question

Your friend holds a portfolio including two stokcs, A and B, with equal amounts of money invested in each. The volatility of A share prices is the same as the volatility of B share prices. They have a perfectly positive correlation.

9.1) The overall volatility of the portfolio is:

A) Less than individual volatility of stock A or B

B) More than individual volatility of Stock A or B

C) The same as individual volatility of Stock A or B

D) More information needed.

9.2) Instead of investing her money equall in each stock, your friend invests 70% of her money in stock A and 30% of her money in stock B. Now the overall volatility of the portfolio is:

A) Increased

B) Decreased

C) Unchanged

D) More information needed.

Answer 1

Variance = (w(1)^2 x o(1)^2) + (w(2)^2 x o(2)^2) + (2 x (w(1)o(1)w(2)o(2)q(1,2))

variance is the square of standard deviation which is another name for volatility in this case both stocks are the same weightage in the portfolio hence w1=w2=0.5.

And since the volatility of the both the stocks is also same the volatility of the portfolio is equal to the volatility of the individual stocks hence option C is the right answer.

9.1 Option C

Since the both stocks have same volatility change in weightage could not bring any change in portfolio.

9.2 Option C