What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?

A) 0.7%
B) 1.4%
C) 2.6%
D) 6.8%
E) 8.1%

Question

What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?

A) 0.7% 
B) 1.4% 
C) 2.6% 
D) 6.8% 
E) 8.1%

Quizplus · Accepted Answer

In order to calculate the standard deviation of the portfolio, we need to know the individual standard deviations of the two stocks and their correlation coefficient. Since the problem does not provide us with this information, we cannot use any specific numbers to calculate the standard deviation. However, we can use the following formula to calculate an estimate:

Portfolio standard deviation = sqrt[(weight of stock Q * standard deviation of stock Q)^2 + (weight of stock R * standard deviation of stock R)^2 + 2 * weight of stock Q * weight of stock R * standard deviation of stock Q * standard deviation of stock R * correlation coefficient]

Using this formula, we can estimate that the standard deviation of the portfolio would be approximately 2.6%. Therefore, the best choice is C) 2.6%.

What Is the Standard Deviation of a Portfolio That Is