Question

A U.S. investor is considering a portfolio consisting of 60% invested in the U.S. equity index fund and 40% invested in the British equity index fund. The expected returns for the funds are 10% for the U.S. and 8% for the British, standard deviations of 20% for the U.S. and 18% for the British, and a correlation coefficient of 0.15 between the U.S. and British equity funds. What is the standard deviation of the proposed portfolio?

Answer 1

standard deviation of the proposed portfolio = 14.89%

Standard Deviation =

Where,

W1= Weight in Security A

W2= Weight in Security B

σ1 = Standard Deviation of Security A

σ2 = Standard Deviation of Security B

Corr(A,B) = Correlation Coefficient between Security A and Security B

Putting the values,

Risk of the Portfolio			14.89%
			Return	Standard Deviation
Weight in U.S. equity index fund	60.0%		10%	20%
Weight in British equity index fund	40.0%		8%	18%
Correlation Between A and B				0.15

Risk of the Portfolio			=SQRT((E4*B4)^2+(E5*B5)^2+(2*B4*B5*E4*E5*E6))
			Return	Standard Deviation
Weight in U.S. equity index fund	0.6		0.1	0.2
Weight in British equity index fund	=1-B4		0.08	0.18
Correlation Between A and B				0.15

For further clarrification Please comment

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