Question

You are going to form a portfolio with stocks A & B with the following information: Stock Expected Return Standard Deviation wi A 10% 30% 0.2 B 20% 40% 0.8 What is the portfolio’s standard deviation

Answer 1

portfolio's standard deviation = 0.3256

Step-by-step explanation:

Stock Expected Return Standard Deviation Wi

A 10% 30% 0.2

B 20% 40% 0.8

covariance = [(10% - 10%) x (20% - 20%)] / (2 - 1) = 0

portfolio's standard deviation = (stock A's Wi² x variance) + (stock B's Wi² x variance) + (2 x covariance x weight A x weight B)

portfolio's standard deviation = √{(0.2² x 0.09) + (0.8² x 0.16) + 0} = √(0.0036 + 0.1024) = √0.106 = 0.3256