Stock A has a standard deviation of 15% per year and Stock B has a standard deviation of 8% per year. The correlation between Stock A and Stock B is .40. You have a portfolio of these two stocks wherein Stock B has a portfolio weight of 40%. What is your portfolio variance?
A).01143
B).01214
C).01329
D).01437
E).01470

Question

Quizplus · Accepted Answer

The portfolio variance is calculated using the formula:  Variance = (wA^2 * σA^2) + (wB^2 * σB^2) + (2 * wA * wB * σA * σB * correlationAB)  Where:  wA = weight of Stock A = 1 - 0.40 = 0.60  wB = weight of Stock B = 0.40  σA = standard deviation of Stock A = 0.15  σB = standard deviation of Stock B = 0.08  correlationAB = 0.40  Variance = (0.60^2 * 0.15^2) + (0.40^2 * 0.08^2) + (2 * 0.60 * 0.40 * 0.15 * 0.08 * 0.40)  Variance = 0.0081 + 0.001024 + 0.002304  Variance = 0.01143

Stock a Has a Standard Deviation of 15% Per Year