Question

Apps Music Gallucios Italian Res. T Marcus's Best Burg.. >>> Other bookma Summary statistics for returns on two stocks X and Y are listed below. Q: Mean Variance Stock X 2.71% 0.003000 Stock Y 3.166 0.005000 The covariance of returns on stocks X and Y is 0.003900. Consider a. portfolio of 70% stock X and 30% stock Y. What is the standard deviation of portfolio returns? Please specify your answer in decimal terms and round your answer to the nearest thousandth (e.g., enter 12.3 percent as 123). Note that the correct answer will be evaluated based on the Forecision result you would obtain using Excel.

Answer 1

The standard deviation of the portfolio returns here is computed as:

$\sigma_p = \sqrt{W_x^2 \sigma_x^2 + W_y^2\sigma_y^2 + 2Cov(X, Y)W_xW_y}$

$\sigma_p = \sqrt{0.7^2*0.003 + 0.3^2*0.005 + 2*0.7*0.3*0.0039}$

$\sigma_p = 0.0596$

Therefore 0.060 or 6.0% is the required standard deviation of the portfolio returns here.