James, a portfolio manager, would like to form the following portfolio between Microsoft and Coca-Cola: &nb...

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James, a portfolio manager, would like to form the following portfolio between Microsoft and Coca-Cola: &nb...

James, a portfolio manager, would like to form the following portfolio between Microsoft and Coca-Cola:

Expected return (%) Standard Deviation (%) Weight

Microsoft 28 42 0.4

Coca-Cola 12.5 21 0.6

The correlation between the two stocks is 0.5.

Rachel, James’ wife, suggests a portfolio which consists 60% of Microsoft and 40% of Coca-Cola.

What is the standard deviation of Rachel’s portfolio? ______%

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Answer 1

Answer #1

Oportfolio = wig+wo3 + 2wW2P1,20102 Where: W W 04 02 P12 = = = = = Proportion of the portfolio invested in Asset 1 Proportion

0 = V(0.40 * 0.42)2 + (0.60 * 0.21)2 + (2*0.40 * 0.60 * 0.42* 0.21* 0,5)

0 = V0.028224 +0.015876 +0.021168

0 = V0.065268

O = 0.2555

Standard deviation = 25.55%

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Answer 2

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