You're crafting a portfolio of two stocks. You plan to buy $3,000 worth of the first...

You're crafting a portfolio of two stocks. You plan to buy $3,000 worth of the first stock and $1,000 worth of the second stock. The standard deviation of the first stock is 20% and the standard deviation of the second stock is 40%. They have a correlation coefficient of 0.3. How volatile will the portfolio be? Answer in percent rounded to two decimal places. (e.g., 4.53% = 4.53)

Expert Solution

w1 = $3000/($3000 + $1000) = 75%

w2 = $1000/($3000 + $1000) = 25%

Standard deviation = 20.37%

wiai+wia+2w, W2 Pi 2 C1 G2 oportfolio Where: Proportion of the portfolio invested in Asset 1 Proportion of the portfolio invested in Asset 2 Asset 1 standard deviation of returns Asset 2 standard deviation of returns Correlation coefficient between the returns of Asset 1 and Asset 2 P12

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