Question

A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio

Answer 1

30.51%

Step-by-step explanation:

The computation of the standard deviation is shown below:

Data provided in the question

Weightage in IBM = 30% = WI

Weightage in MFST = 100 - 30% = 70% = WM

The Volatility in IBM = 35% = VI

The Volatility in MFST = 30% = VM

Correlation = 0.5 = C

Based on the above information

The standard deviation is

`= √((VI^2* WI^2) + (VM^2 * WM^2) + (2 * VI * WI * VM * WM * C))`

`= √((0.35^2* 0.30^2) + (0.35^2 * 0.70^2) + (2 * 0.35 * 0.30* 0.30 * 0.70 * 0.5))`

= 30.51%