Question

Mr. Jones has a 2-stock portfolio with a total value of $500,000. $185,000 is invested in Stock A and the remainder is invested in Stock B. If standard deviation of Stock A is 20.40%, Stock B is 10.30%, and correlation between Stock A and Stock B is 0.20, what would be the expected risk on Mr. Jones’ portfolio (standard deviation of the portfolio return)?

Calcualte with at least 4 decimal places and round your answer to two decimal places. For example, if your answer is $345.6671 round as 345.67 and if your answer is .05718 or 5.7182% round as 5.72.

Group of answer choices

10.89%

11.66%

11.11%

8.93%

11.55%

Answer 1

Weight of Stock A = 185,000 / 500,000 = 0.37

Weight of stock B = (500,000 - 185,000) / 500,000 = 0.63

Portfolio standard deviation = (W1²Q1² + W2²Q2² + 2 * W1 *W2 * Correlation* Q1 * Q2)^1/2

Portfolio standard deviation = (0.37²0.2040² + 0.63²0.103² + 2 * 0.37 * 0.63 * 0.2 * 0.2040 * 0.103)^1/2

Portfolio standard deviation = (0.1369*0.041616 + 0.3969*0.010609 + 0.001959)^1/2

Portfolio standard deviation = (0.005697 + 0.004211 + 0.001959)^1/2

Portfolio standard deviation = 0.1089 or 10.89%