An investor is given the two investment alternatives (Assets A and B) with the following characteristics: Asset Expected Return Standard Deviation of Returns A 18.4 percent 16.5 percent B 10.8 percent 6.8 percent What is the standard deviation of a portfolio comprised of 60 percent of an investor's wealth invested in Asset A and 40 percent invested in Asset B if the correlation between the returns of A and Asset B are 0.70?

Question

Business

Audrina

29 December, 09:28

An investor is given the two investment alternatives (Assets A and B) with the following characteristics: Asset Expected Return Standard Deviation of Returns A 18.4 percent 16.5 percent B 10.8 percent 6.8 percent What is the standard deviation of a portfolio comprised of 60 percent of an investor's wealth invested in Asset A and 40 percent invested in Asset B if the correlation between the returns of A and Asset B are 0.70?

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Jamie Vega · Answer 1

12.00%

Explanation:

As per the given question the solution of standard deviation of a portfolio is provided below:-

Standard deviation of a portfolio = √ (Standard deviation of Product 1) ^2 * (Weight 1) ^2 + Standard deviation of Product 2) ^2 * (Weight 2) ^2 + 2 * Standard deviation of product 1 * Standard deviation of product 2 * Weight 1 * Weight 2 * Correlation

= √ (0.165^2 * 0.6^2) + (0.068^2 * 0.4^2) + (2 * 0.6 * 0.4 * 0.165 * 0.068 * 0.7)

= √0.009801 + 0.0007398 + 0.00376992

= √0.01431076

= 0.119628592

or

= 12.00%

So, we have calculated the standard deviation of a portfolio by using the above formula.