Suppose you invest 70% of your portfolio in Coca Cola and the remainder in Pepsi. The...

Suppose you invest 70% of your portfolio in Coca Cola and the remainder in Pepsi. The expected dollar return on your Coca Cola investment is 14.1% and on Pepsi is 10.0%. The standard deviation of returns was 21% for Coca Cola and 17% for Pepsi. Assume a correlation coefficient of 0.8. Calculate the portfolio standard deviation.

Expert Solution

Standard Deviation of portfolio=√(W Coca Cola^2 × σ Coca Cola^2) +(W Pepsi^2 × σ Pepsi^2)+2 × r × W Coca Cola × W Pepsi × σ Coca Cola × σ Pepsi

Where,
W Coca Cola=Weight of Coca Cola
W Pepsi=Weight of Pepsi
σ Coca Cola=Standard Deviation of Coca Cola
r = correlation coefficient

=√(0.7^2 × 21%^2) +(0.3^2 × 17%^2) + 2×0.8 × 0.7 × 0.3 × 21% × 17%

=√216.09+26.01+119.952

=√242.1

=19.03%

jeff jeffy answered 2 years ago

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