One Liberty Heico .12 .16 .08 .20 15.67% 9.44% 10.54% 9.67% 21. Christy is consi

Question

One Liberty

Heico

.12

.16

.08

.20

       15.67%
       9.44%
       10.54%
       9.67%

21. Christy is considering investing in the common stock of One Liberty and Heico. The following data are available for these two securities:

One Liberty

Heico

Expected return

.12

.16

Standard deviation of returns

.08

.20

If she invests 30% of her funds in Heico and 70% in One Liberty, and if the correlation of returns between these securities is +0.65, what is the portfolio's standard deviation? (Points : 3)

Explanation / Answer

Formula rot he variance = w1^SD1^2 +W2^2SD2^2 + 2* w1*w2*SD1*SD2*Corrwlation

=(0.3*0.8)^2 +(0.7*0.2)^2 + 2.0.3*0.80*00.7*0.2 *0.65

= 2.45%

Sqrt(2.45%) = 15.68%(Standard Deviation)

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