Suppose Wesley? Publishing's stock has a volatility of 65%?, while Addison? Printing's stock has a volatility...

Suppose Wesley? Publishing's stock has a volatility of 65%?, while Addison? Printing's stock has a volatility of 25%. If the correlation between these stocks is 40%?, what is the volatility of the following portfolios of Addison and? Wesley:

a. 100% Addison

b. 75% Addison and 25% Wesley

c. 50% Addison and 50% Wesley

Expert Solution

In order to calculate the volatility (which is standard deviation) of a portfolio's return, where the portfolio consists of 2 stocks, we use the following formula:

a. When 100% of portfolio is in Addison stock, the volatility of portfolio is same as that of the Addisson stock. Therefore, the vlatility in this case of portfolio is 25%m which is Addison's stock volatility. You can also try putting in weight of stock Wesley in the above formula as zero, which would lead you to the 25% result.

b. When 75% Addison and 25% Wesley, standard deviation for portfolio can be calculated as:

= 29.32%

c. When 50% Addison and 50% Wesley, standard deviation for portfolio can be calculated as:

= 39.21%

jeff jeffy answered 2 years ago

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