Question

33). You put half of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 24%. You put the rest of you money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 12%. The stock and bond portfolio have a correlation 0.55. The standard deviation of the resulting portfolio will be ________________.

Answer 1

Answer:

16.0996% rounded off to 16.1%

Explanation:

We can calculate the standard deviation of a portfolio, that is the total risk of a portfolio, using the following formula,

S.D = √ (w1)² (S.D1)² + (w2)² (S.D2)² + 2 (w1) (w2) (correlation) (S..D1) (S.D2)

Where,

• w1 is the weigh-age of investment in stock/bond 1
• S.D1 is standard deviation of returns of stock/bond 1
• w2 is the weight-age of stock/bond 2
• S.D2 is the standard deviation of returns of stock/bond 2
• correlation is the correlation between the returns of stock/bond 1 and 2

We calculate the S.D of given portfolio,

S.D = √ (0.5)² (0.24)² + (0.5)² (0.12)² + 2 (0.5) (0.5) (0.55) (0.24) (0.12)

S.D = 0.160996 or 16.0996 %