Question

you're crafting a portfolio of two stocks. you have 70% of your money in the first stock and the rest of your money the second stock. the volatility of the first stock is 35% and the volatility of the second stock is 18%. the returns of the two stocks have a correlation coefficient of -0.2. what is the volatility of the portfolio? answer in percent, showing one decimal place.

Answer 1

The volatility of the portfolio can be calculated using the formula for weighted average volatility.

Step-by-step explanation:

To determine the volatility of the portfolio, we can use the formula for the weighted average volatility.

First, we calculate the weighted average of the volatilities of the two stocks:

Volatility portfolio = (Weight 1 × Volatility 1) + (Weight 2 × Volatility 2)

Given that the first stock has 70% of the portfolio and a volatility of 35%, and the second stock has the remaining 30% of the portfolio and a volatility of 18%, the calculation would be:

Volatility portfolio = (0.7 × 35%) + (0.3 × 18%) = 0.245 + 0.054 = 0.299 = 29.9%

Therefore, the volatility of the portfolio is 29.9%.