1. Let’s assume an investor wants to invest some money into the following two stocks.  The
expected return and standard deviation for the two assets are given in the table below.  What
would be portfolio's standard deviation if the correlation coefficient between the two assets is +1
and you invest 80 percent of your money in A and 20 percent in B
Asset A 0.05 0.1 Asset B 0.2 0.25 Return Standard deviation
Solution
portfolio's standard deviation
=[(weight of asset A) 2
* (standard deviation of asset A) 2
+ (weight of asset B) 2
* (standard
deviation of asset B) 2
+ 2 *(weight of asset A) * (standard deviation of asset A) *
(weight of
asset B) * (standard deviation of asset B) * correlation] 1/2
=[(0.8) 2
* (0.1) 2
+ (0.2) 2
* (0.25) 2
+ 2 *(0.8) * (0.1) *
(0.2) * (0.25) * 1] 1/2
=
[0.64 * 0.01 + 0.04 * 0.0625 + 0.008] 1/2
=
[0.0169] 1/2
=
13%