The expected return and standard deviation of a portfolio that is 40 percent inv

Question

The expected return and standard deviation of a portfolio that is 40 percent invested in 3 Doors, Inc., and 60 percent invested in Down Co. are the following:

What is the standard deviation if the correlation is +1? 0? 1? (Do not round intermediate calculations. Enter your answer as a percent rounded to 2 decimal places. Omit the "%" sign in your response.)

Correlation +1 (%)

Correlation 0 (%)

Correlation -1 (%)

3 Doors, Inc. Down Co.   Expected return, E(R) 15 % 11 %   Standard deviation, 48 37

Explanation / Answer

Portfolio Variance = w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*(RA)*(RB)

Column1 Column2 Correlation =1 Variance = (0.4^2*0.48^2+0.6^2*0.37^2+2*0.4*0.6*0.48*0.37*1) 0.171396 Stdandard Deviation = (Variance)^0.5 41.40% Correlation =0 Variance = (0.4^2*0.48^2+0.6^2*0.37^2+2*0.4*0.6*0.48*0.37*0) 0.086148 Stdandard Deviation = (Variance)^0.5 29.35% Correlation =-1 Variance = (0.4^2*0.48^2+0.6^2*0.37^2+2*0.4*0.6*0.48*0.37*-1) 0.0009 Stdandard Deviation = (Variance)^0.5 3.00%

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