Fred Inc. and Ginger Corp. are two manufacturers of high quality toys in the US.

Question

Fred Inc. and Ginger Corp. are two manufacturers of high quality toys in the US. Fred Stock Price $40 Standard Deviation Returns 45% Beta 1 D/E (market ratios) 0.3 M/B 2 and Ginger Stock Price $30 Standard Deviation Returns 35% Beta 1.3 D/E (market ratios) 0.9 M/B 2.1 Market expected return 10% Risk Free Rate 4% Correlation of Ginger and Fred’s returns 0 19. A portfolio consisting of 60% Fred and 40% Ginger will have the following standard deviation (pick closest answer) a. 41.00% b. 40.00% c. 34.56% d. 30.41% e. 9.25%

Explanation / Answer

std dev=( w2A*2(RA) + w2B*2(RB) + 2*(wA)*(wB)*Cor(RA, RB)*(RA)*(RB))^0.5

=(.6^2*45^2+.4^2*35^2+2*.6*.4*45*35)^(1/2) = 41%

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