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Up7
You are given the following portfolio:
Company Name Amount invested Standard Deviation Isotics 15,000 0.3 Ambiss 5,000 0.1 The portfolio’s standard deviation, if the covariance is 0.05, is closest to:
- 20%
- 23%
- 26%
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Up1
The portfolio standard deviation formula is:
σp = √[(w1^2)(σ1^2) + (w2^2)(σ2^2) + 2(w1)(w2)Cov(R1, R2)]We have:
w1 = 15,000 / 20,000 = 0.75
w2 = 5,000 / 20,000 = 0.25
σ1 = 0.3
σ2 = 0.1
Cov(R1, R2) = 0.05Therefore,
σp = √[(0.75^2)(0.3^2) + (0.25^2)(0.1^2) + 2(0.75)(0.25)(0.05)] = 0.2645 -
Up1
Woo! I got it right. 🙂
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