The standard deviation of the portfolio of two stocks is approximately 16.06%.The portfolio standard deviation is found to be approximately 16.06%.
The standard deviation of a portfolio of two stocks can be calculated using the formula:
Portfolio standard deviation = sqrt((wA^2 * σA^2) + (wB^2 * σB^2) + (2 * wA * wB * ρ * σA * σB))
where:
- wA and wB represent the weights of stock A and stock B in the portfolio, respectively (wA = 0.6 and wB = 0.4 in this case),
- σA and σB represent the standard deviations of stock A and stock B, respectively (σA = 19% and σB = 21% in this case),
- ρ represents the correlation coefficient between the two stocks (ρ = -0.4 in this case).
By substituting the given values into the formula, we can calculate the portfolio standard deviation as follows:
Portfolio standard deviation = sqrt((0.6^2 * 19%^2) + (0.4^2 * 21%^2) + (2 * 0.6 * 0.4 * -0.4 * 19% * 21%))
After performing the calculations, the portfolio standard deviation is found to be approximately 16.06%.Therefore, the standard deviation of the portfolio of two stocks is approximately 16.06%.
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