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4 January, 10:55

Your client, Alex, has only two assets in his portfolio: assets A and B. Asset A had a standard deviation of 40%, and Asset B has a standard deviation of 20%. 50% of his portfolio is invested in Asset A, and 50% is invested in Asset B. The correlation for assets A and B is 0.90. What is the standard deviation of Alex s portfolio?

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  1. 4 January, 12:41
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    Standard deviation of the portfolio = 70.71%

    Explanation:

    σP = √ (w²A * σ²A) + (w²B*σ²B) + 2 (wA*wB*correl. AB)

    w = weight of ...

    Given that;

    wA = 50% or 0.5 as a decimal

    wB = 50% or 0.5

    σA = 40% or 0.4

    σB = 20% or 0.2

    correl. = correlation = 0.90

    σP = √ (0.5² * 0.4²) + (0.5² * 0.2²) + (2*0.5*0.5*0.90)

    σP = √ (0.04 + 0.01 + 0.45

    = √0.5

    = 0.7071

    Standard deviation of the portfolio = 70.71%
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