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Question 27 2 pts Bonds have an expected return of 7% and an annual standard deviation of 10% and the stock! market has an ex
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Answer #1

Portfolio standard deviation for a two-asset portfolio is given by the following formula:

oß = wio1 +wžož +2w1w2Cov 1,2

Bonds (A)

Stocks (B)

Return

7%

12%

Standard deviation

10%

25%

Weight of A = 25%

Weight of B = 75%

Correlation coefficient between returns of A & B is 0.50

                 

Variance = (0.25)2(0.10) 2 + (0.75) 2 (0.25) 2 + 2(0.25)(0.75)(0.10)(0.25)(0.50)

                  =0.040

Portfolio standard deviation is the square root of variance

                  = Square root (0.040)

                  = 0.20

Portfolio standard deviation is 0.20

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