Standard deviation of the portfolio with stock A is Standard deviation of the po
ID: 2789249 • Letter: S
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Standard deviation of the portfolio with stock A is
Standard deviation of the portfolio with stock B is
Yau hava a art llo with a standar de ation 21 and an expectad rat im o 5% You are ennslda ng ding one o tha two stocks n tha folo ng tahla after adding the stnck yn ill h e 2 A n ynur monay n tn n stack and 75% o yo r mane n your ex sting port lin w h one should you add Conelation with Return Deviation Your Portfolio's Returns Stock A 15% 15% 23% 16% 0.3 0.6 Stendard deviation of the portfolio with stock A is % tRoundto two decimel places.)Explanation / Answer
a) New Portfolio with Stock A: Expected return = 15*0.75+15*0.25 = 15.00% SD (Using the formula for finding the SD of a two asset portfolio) = (0.23^2*0.25^2+0.21^2*0.75^2+2*0.23*0.21*0.25*0.75*0.3)^0.5 = 18.32% b) New Portfolio with Stock B: Expected return = 15*0.75+15*0.25 = 15.00% SD (Using the formula for finding the SD of a two asset portfolio) = (0.16^2*0.25^2+0.21^2*0.75^2+2*0.16*0.21*0.25*0.75*0..6)^0.5 = 18.43% Answer: Standard deviation of the portfolio with stock A is 18.32% Standard deviation of the portfolio with stock B is 18.43% DECISION: The expected return is the same for both the combinations. But, as the SD of the new portfolio with Stock A is less, it should be added. NOTE: FORMULA FOR CALCULATING SD OF A TWO ASSET PORTFOLIO" [(SDa2 × Wa2) + (SDb2 × Wb2) + 2 (Wa)(Wb)(SDa)(SDb)(CORab)]½ Where SDa = SD of Asset A SDb = SD of Asset B Wa = Weight of Asset A Wb = Weight of Asset B COR ab = Correlation between returns of Assets A & B
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