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%

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) = 0.05 Therefore, σp = √[(0.75^2)(0.3^2) + (0.25^2)(0.1^2) + 2(0.75)(0.25)(0.05)] = 0.2645

Question Of The Week - Portfolio Management (10) - CFA Level 1

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This topic has 2 replies, 2 voices, and was last updated Jan-188:34 am by shannondaily.

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- AdaptPrep
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  08 Oct 2017 at 7:11 pm
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  The portfolio standard deviation formula is:
  σ_p = √[(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) = 0.05
  
  Therefore,
  σ_p = √[(0.75^2)(0.3^2) + (0.25^2)(0.1^2) + 2(0.75)(0.25)(0.05)] = 0.2645
- shannondaily
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  24 Jan 2018 at 8:34 am
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  Woo! I got it right. 🙂
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