You put 60% of your money in a stock portfolio that has an expected return of...

You put 60% of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 26%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 11%. The stock and bond portfolios have a correlation of 0.36. The standard deviation of the resulting portfolio is %.

Please enter your answer with TWO decimal points.

Expert Solution

standard deviation for a two-asset portfolio σ_p = (w₁²σ₁² + w₂²σ₂² + 2w₁w₂Cov_1,2)^1/2

where σ_p = standard deviation of the portfolio

w₁ = weight of Asset 1

w₂ = weight of Asset 2

σ₁ = standard deviation of Asset 1

σ₂ = standard deviation of Asset 2

Cov_1,2 = covariance of returns between Asset 1 and Asset 2

Cov_1,2 = ρ_1,2 * σ₁ * σ_2, where ρ_1,2 = correlation of returns between Asset 1 and Asset 2

standard deviation = ((0.6² * 0.26²) + (0.4² * 0.11²) + (2 * 0.6 * 0.4 * 0.36 * 0.26 * 0.11))^1/2

standard deviation = 0.1767, or 17.67%

jeff jeffy answered 2 years ago

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