Question

The standard deviation of a portfolio consisting of 30% of Stock X and 70% of Stock Y is:

Stock Expected Return Standard Deviation Correlation Coefficient
X 5% 20% 0.4
Y 10% 25%

A. 20.65%
B. 4.26%
C. 34.20%
D. 21%

Answer 1

The portfolio SD is A. 20.65%

Step-by-step explanation:

The standard deviation tells the total risk (both systematic and unsystematic) associated with a stock or a portfolio. The portfolio risk or the standard deviation of portfolio can be calculated using the following formula as attached in the picture below.

Using this formula, the standard deviation of the portfolio is:

SDp = √(0.3)² * (0.2)² + (0.7)² * (0.25)² + 2 * (0.3)*(0.7) * 0.4 * (0.2)*(0.25)

Portfolio SD = 0.20645 or 20.645% rounded off to 20.65%