Question

An investor puts 27.00% of his investment into Cisco Systems, and the remaining 73.00% into Apple Computer. The standard deviation on Cisco Systems stock is 31.00%, while the standard deviation on Apple Computer is 28.00%. Find the standard deviation of this portfolio if the correlation between the two stocks is 0.55. Submit

Answer 1

Standard deviation on Cisco system = 31%
Standard deviation on Apple computer = 28%

Weight of Cisco system = 27%
Weight of Apple computer = 73%

Correlation = 0.55

Co-variance = 0.31 * 0.28 * 0.55 = 0.0477

Standard deviation for the portfolio = [(SDA^2 × WA^2) + (SDB^2 × WB^2) + 2 (WA)(WB)(COVAB)]^(1/2)

= ((0.31^2 * 0.27^2) + (0.28^2 * 0.73^2) + (2 * 0.27 * 0.73 * 0.0477))^(1/2)

Standard deviation for the portfolio = 26%

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