Answer:
15.7%
Explanation:
The standard deviation of a portfolio of two stocks given the following data: Stock A has a standard deviation of 22%.
Stock B has a standard deviation of 16%.
The portfolio is equally weighted and the correlation coefficient between the two stocks is .35.
Standard deviation = √
(0.50)2(0.22)2 + (0.50)2(0.16)2 + 2(0.35)(0.22)(0.16)(0.5)(0.5) = 0.157
0.157 = 15.7%
Answer: 15.7%
Explanation:
Given the following ;
Sa = standard deviation of stock A = 22%
Sb = standard deviation of stock B = 16%
Cc = correlation coefficient between the stock A and B = 0.35
Sp = portfolio standard deviation
Wa = weight of stock A
Wb = weight of stock B
However, WA and Wb are equal
Therefore, Wa = Wb = 0.5
Portfolio standard deviation(Sp) involving two stocks or asset as in above is evaluated using the formula;
Sp = sqrt(Wa^2Sa^2 + Wb^2Sb^2 + 2WaWbSaSbCc)
Sp = sqrt(0.5^2×22%^2 +0.5^2× 16%^2 + 2×16%×22%0.5×0.5×0.35)
Sp = sqrt((0.5^2×0.22^2) + (0.5^2×0.16^2) + ( 2×0.16×0.22×0.5×0.5×0.35))
Sp =sqrt(0.02466)
Sp = 0.1570
Sp = 15.7%
