Question

Toyota Corp's stock is $32 per share. Its expected return is 20% and variance is 11%. Honda Corp's stock is $21 per share. Its expected return is 17% and variance is 9%. Benz Corp's stock is $50 per share. Its expected return is 15% and variance 7%. The covariance between Toyota and Honda is 0.06. What would be the standard deviation of a portfolio consisting of 50% Toyota and 50% Honda?

Answer 1

To find the standard deviation of a portfolio with 50% Toyota and 50% Honda stocks, use the standard deviation formula for a two-asset portfolio, incorporating the weights, variances, and covariance.

Step-by-step explanation:

The question asks about the calculation of the standard deviation of a portfolio comprising of stocks from Toyota Corp and Honda Corp. To find the standard deviation of this two-stock portfolio, we use the formula for the standard deviation of a two-asset portfolio which incorporates the weights of the stocks, their individual variances, and the covariance between the two stocks. Since the question gives you a portfolio consisting of 50% Toyota and 50% Honda, you would calculate the standard deviation by taking the square root of the weighted variances and the weighted covariance.

The formula to use is √[w₁²σ₁² + w₂²σ₂² + 2w₁w₂cov(1,2)], where w₁ and w₂ are the weights of Toyota and Honda respectively, σ₁² and σ₂² are the variances, and cov(1,2) is the covariance between Toyota and Honda's stocks. Plugging in the values and solving would give you the portfolio's standard deviation.