Variance and Standard Deviation of Portfolio standard, expected, benefits, understand

TheMBAGlover

I don't really understand how they are calculating the answer to this. My thinking was to simply get the weighted average of the standard deviations. Can someone explain in more detail?

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 = 0.03836; Standard Deviation = 19.59%.

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

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





--------------------------------------------------------------------------------
Click for Answer and Explanation

(0.40)2(0.18)2 + (0.60)2(0.24)2 + 2(0.4)(0.6)(0.18)(0.24)(0.6) = 0.03836.

0.038360.5 = 0.1959 or 19.59%.

sdada

Nevermind, I didnt realize there is an exact formula for this (standard deviation portfolio formula)

soddy1979

I figurd out an alternate way. I took the expected returns for each and created a weighted average, then used that for calculating the variance of the portfolio.