To calculate the standard deviation of returns of a portfolio that holds Stock A and Stock B, we need to use the given information and the formula for calculating portfolio standard deviation. By plugging in the values, we find that the standard deviation of portfolio P is 17.8% Option A.
To calculate the standard deviation of returns of a portfolio, we need to use the formula:
Standard deviation of portfolio
P = √((weight of stock A)² * (standard deviation of stock A)² + (weight of stock B)² * (standard deviation of stock B)² + 2 * (weight of stock A) * (weight of stock B) * (standard deviation of stock A) * (standard deviation of stock B) * (correlation between stock A and stock B))
Using the given information, we have:
Weight of stock A = 45%
Weight of stock B = 55%
Standard deviation of stock A = 20%
Standard deviation of stock B = 28%
Correlation between stock A and stock B = -0.2
Plugging these values into the formula:
Standard deviation of portfolio P
= √((0.45)² * (0.20)² + (0.55)² * (0.28)² + 2 * (0.45) * (0.55) * (0.20) * (0.28) * (-0.2))
= 0.1779 or 17.8%