Question 1
Multiple Choice
Confidence Level
0%
Consider a portfolio with two assets. Asset X comprises 40% of the portfolio and has a standard deviation of 12.5%. Asset Y comprises 60% of the portfolio and has a standard deviation of 7.8%. If the correlation between the two investments is 0.35, the portfolio’s standard deviation is closest to:
Explanation
To calculate the portfolio’s standard deviation, use the formula:
σ _{p} = √ w ^{2} _{x} σ ^{2} _{x} + w ^{2} _{y} σ ^{2} _{y} + 2w _{2} w _{y} p _{xy} σ _{x} y _{y}
Where:
w _{x} = 0.40 | σ_{x} = 0.125 | p_{xy} = 0.35 |
w _{y} = 0.60 | σ _{y} = 0.078 | (Intentionally Blank) |
σ _{p} = √ (0.40) ^{2} (0.125) ^{2} + (0.60) ^{2} (0.078) ^{2} + 2 (0.40)(0.60)(0.35)(0.125)(0.078)
=
9.07%