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Consider two risky assets A and B with E(rA)= 15%, Sigma= 32%, E(rB)= 0.09, Sigma B=...

Consider two risky assets A and B with E(rA)= 15%, Sigma= 32%, E(rB)= 0.09, Sigma B= 23%, corrA,B= 0.2. The risk free rate is 5%. The optimal risky portfolio of comprised of the two risky assets is to allocate 64% to A and the rest to B. What is the standard deviation of the optimal risky portfolio

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Answer #1

Standard Deviation of Portfolio = [(w1)2(s1)2 + (w2)2(s2)2 + 2(w1)(w2)(s1)(s2)Correlation]1/2

Standard Deviation of Portfolio = [(0.64)2(0.32)2 + (0.36)2(0.23)2 + 2(0.64)(0.36)(0.32)(0.23)(0.20)]1/2

Standard Deviation of Portfolio = 0.2358

Standard Deviation of Portfolio = 23.58%

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