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23 August, 12:52

A portfolio has 30% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 35% and 30%, respectively, and the correlation between IBM and MSFT is 0.5. What is the standard deviation of the portfolio excel?

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  1. 23 August, 14:53
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    The standard deviation of the portfolio is 26.15%

    Explanation:

    First the formula of variance of a portfolio is used.

    Take the square root of variance to get standard deviation.

    (0.3) ^2 * (0.35) ^2 + (0.7) ^2 * (0.3) ^2 + 2 * 0.3 * 0.7 * 0.35 * 0.3 * 0.3 = 0.068355

    Taking square root of 0.068355 to get standard deviation that is 26.15%
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