Indiana Jones intends to form a portfolio with two securities: Virtual and Real.Virtual has an expected return of 25 percent with a standard deviation of 5 percent.Real has an expected return of 12 percent with a standard deviation of 16 percent.The correlation between the two securities is 0.2.What is the portfolio standard deviation if the portfolio has an expected return of 20 percent?
A) 0.55%
B) 1.08%
C) 7.41%
D) 10.40%

Question

Quizplus · Accepted Answer

Portfolio weight in Virtual,W_V = (ER_P-ER_R)/(ER_V-ER_R)= (20%-12%)/(25%-12%)= 0.6154 Portfolio weight in Real,w_r = 1 - 0.6154 = 0.3846 σ_P = √[(w²_V)(σ²_V)+(w²_R)(σ²_R)+2(w_V)(w_R)(σ_V)(σ_R)(ρ_VR)] = √(0.00095+0.00379+0.000757)= 7.41%

Indiana Jones Intends to Form a Portfolio with Two Securities