Question

There are two risky assets. The first is a stock fund, and the second is a long-term government and corporate bond fund. The probability distribution of risky funds is as follows:

	Expected ret.	std. dev.
stock fund	0.11	0.23
bond fund	0.5	0.1

The correlation between the fund returns is 0.03. T-bill rate is 0.37. A portfolio has 40% of assets invested in the stock fund and 60% of assets invested in the bond fund. What is the standard deviation of the portfolio?

Round your answer to 4 decimal places. For example, if your answer is 3.205%, then please write down 0.0321.

Answer 1

Given:

Return of Stock fund= 11% or 0.11
Return of Bond fund= 5% or 0.5
Standard deviation of stock fund= 0.23
Standard deviation of bond fund= 0.1
correlation= 0.03
Weight of stock fund=40% or 0.4
Weight of bond fund=60% or 0.6

Standard Deviation of the portfolio=

Portfolio Risk=  

=

= 0.1113

= 11.13%

the standard deviation of the portfolio is 0.1113 or 11.13