A portfolio has 40% of its value in IBM shares and the rest in Microsoft (MSFT). The volatility of IBM and MSFT are 40% and 30%, respectively, and the correlation between IBM and MSFT is -0.3. What is the standard deviation of the portfolio?
A) 19.17%
B) 18.16%
C) 22.20%
D) 20.18%

Question

Quizplus · Accepted Answer

D) Use the formula for variance of a portfolio: Take the square root of variance to get standard deviation. (0.4)² × (0.40)² + (0.6)² × (0.3)² - 2 × 0.4 × 0.3 × 0.4 + 0.6 × -0.3 = 0.040720; square root of 0.040720 to get standard deviation = 20.18%.

A Portfolio Has 40% of Its Value in IBM Shares