Question

Question 34 1 pts You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 20%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 14%. The stock and bond portfolios have a correlation of 50. The standard deviation of the resulting portfolio will be more than 14% but less than 17% equal to 17.4% equal to 17.0% more than 17% but less than 20% equal to 18.6% • Previous Next > Not saved Submit Quiz

Answer 1

Portfolio SD:

Assume A = Stock

B = Bond

Particulars	Amount
Weight in A	0.5
Weight in B	0.5
SD of A	20%
SD of B	14%
r(1,2)	0.5
Portfolio SD = SQRT[((Wa*SDa)^2)+((Wb*SDb)^2)+2*(wa*SDa)*(Wb*SDb)*r(1,2)]
=SQRT[((0.5*0.2)^2)+((0.5*0.14)^2) + 2 *(0.5*0.2)*(0.5*0.14)*0.5]
=SQRT[((0.1)^2)+((0.07)^2)+2*(0.1)*(0.07)*0.5]
=SQRT[(0.01)+((0.0049 ) + (0.007) ]
=SQRT[0.0219]
14.80%

Hence Option A is correct.

Pls comment, if any further assistance is required.