Portfolio Mgmt benefits, expected, standard, between, percent

whaler

Betsy Minor is considering the diversification benefits of a two stock portfolio. The expected return of stock A is 14 percent with a standard deviation of 18 percent and the expected return of stock B is 18 percent with a standard deviation of 24 percent. Minor intends to invest 40 percent of her money in stock A, and 60 percent in stock B. The correlation coefficient between the two stocks is 0.6. What is the variance and standard deviation of the two stock portfolio?

A) Variance = 0.02206; Standard Deviation = 14.85%.

B) Variance = 0.04666; Standard Deviation = 21.60%.

C) Variance = 0.03836; Standard Deviation = 19.59%



Apparently, we have to know the calculation for the stdev of a portfolio consisting of 2 risky assets i and j:

w = weight
s=stdev

(si^2)*(wi^2)+(sj^2)(wj^2)+2*wiwjsisjCorrij

Finalnub

It is so easy to make a mistake using that formula. One wrong decimal place and it's all wrong.

mnieman

Me knowing that for the exam = highly unlikely.

LokiDog2

I think in most of these questions we dont need to calculate anything. There is a similar question (which is much bigger).

The answer without doing the calculation should be A. My trick is to multiply the weights with the corresponding standard deviations.

(0.4*14)+(0.6*18)=16.4% (this is the standard deviation if the assets were perfectly positively correlated r=+1)

since in this case the correlated=+0.6<+1, there would be diversification benefits and portfolio risk would be less than 16.4%.

jim8z3

kh.asif Wrote:
-------------------------------------------------------
> I think in most of these questions we dont need to
> calculate anything. There is a similar question
> (which is much bigger).
>
> The answer without doing the calculation should be
> A. My trick is to multiply the weights with the
> corresponding standard deviations.
>
> (0.4*14)+(0.6*18)=16.4% (this is the standard
> deviation if the assets were perfectly positively
> correlated r=+1)
>
> since in this case the correlated=+0.6<+1, there
> would be diversification benefits and portfolio
> risk would be less than 16.4%.


So you're saying that since the correlation is less than 1, the portfolio standard deviation must be less than the weighted average of 16.4%, so you think the answer is A?