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The portfolio standard
deviation formula is:(sigma_p)^2 = (w_1)^2 *
(sigma_1)^2 + (w_2)^2 * (sigma_2)^2 + 2(w_1)(w_2) * Cov(R_1, R_2)We have:
w_1 = 15,000 / 20,000 = 0.75
w_2 = 5,000 / 20,000 = 0.25
sigma_1 = 0.3
sigma_2 = 0.1
Cov(R_1, R_2) = 0.05
Therefore,
(sigma_p)^2 = (0.75^2)(0.3^2)
+ (0.25^2)(0.1^2) + 2(0.75)(0.25)(0.05) = 0.07sigma_p = (0.07)^0.5 = 0.2645





I would also highlight the interaction between correlation, beta, variance and standard dev. I had the below all on one card:
correlation (p) = Cov1,2 / (sigma_1) (sigma_2)
Beta (b) = Cov1,2 / Variance_market
Beta (b) = (p) (sigma_1) / Sigma_market
The above mentioned formula: (sigma_p)^2 = (w_1)^2 *
(sigma_1)^2 + (w_2)^2 * (sigma_2)^2 + 2(w_1)(w_2) * Cov(R_1, R_2)I passed level 1 last year and still remember these formulas. I had this index card stock to my monitor at work. I had other cards stuck in the bathroom, on my desk for when I got up in the morning, etc. Hopefully this will help some of you too ðŸ™‚


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