Question

Chapter 06 Practice Test Question 07 Calculating A Two Security Portfolio Standard Deviation An investor puts 70% of their money in Stock 1 and the rest in Stock 2. Stock 1 has a standard deviation of 51% and Stock 2 has a standard deviation of 39%. The covariance between the two stocks is 0.091575. What is the portfolio's standard deviation? points Skipped 1 eBook 0 Print References 0 40.35% 0 47.21% 0 42.38%

Answer 1

Variance of portfolio
Xa^2(STDRa)^2 + Xb^2(STDRb)^2 + 2XaXbCovariance(A,B)
Xa = .70
STDRa = .51
Xb = .30
STDRb = .39
Covariance(A,B) = .091575.
Variance of the portfolio = (.70)^2*(.51)^2+(.30)^2*(.39)^2+2*(.70)*(.30)*(.091575)
Variance of the portfolio = (.49)*(2601)+(.09)*(1521)+.038462
Variance of the portfolio = (.127449)+(.013689)+.038462
Variance of the portfolio = .1796
Standard deviation of the portfolio = (Variance)^(.5)
Standard deviation of the portfolio = (.1796)^(.5)
Standard deviation of the portfolio = (.423792)
42.38%.