Question

Stock X has a standard deviation of 22 percent per year and stock Y has a standard deviation of 8 percent per year. The correlation between stock A and stock B is .21. You have a portfolio of these two stocks wherein stock Y has a portfolio weight of 40 percent. What is your portfolio variance?

Answer 1

2.02%

Step-by-step explanation:

WY = Weight of Stock Y = 40%

WX = Weight of Stock X = 100% - 40% = 60%

Portfolio variance = (WX^2 * SDX^2) + (WY%^2 * SDY^2) + (2 * WX * SDX * WY * SDY * CFxy) ......................... (1)

SDX = Standard deviation of stock X = 22%

SDY = Standard deviation of stock Y = 8%

CFxy = The correlation between stock X and stock Y = 0.21

Substituting all the values into equation (1), we have:

Portfolio variance = (60%^2 * 22%^2) + (40%^2 * 8%^2) + (2 * 60% * 22% * 40% * 8% * 0.21) = 2.02%