For the following given data

We have Formulas

· Beta = Covariance / Variance

· Standard deviation= Variance ^(1/2)

· Or Var = Std dev ^2

· Covariance = Correlation * Std dev 1 * Std dev 2

For Stock A

Beta = 1.3

Corell = 0.8

Std dev of market = 0.135

So the variance of the market = (0.135)^2 = 0.018225

Covariance = Beta * Variance = * 1.3 * 0.018825 = 0.02369

So the Standard deviation of the stock = Covariance / (Corell * Std dev 1)

= 0.02369 / ( 0.8 * 0.135 ) = 0.2193 or 21.93 % for stock A

Now for Stock B we have

Std dev B = 0.16 or 16 %

Correlation = 0.64

Weights of investment = 130% in A and Shorted (– 30%) in B

For the Lending Borrowing portfolio , We have the Std dev of the portfolio as

Portfolio Standard Deviation

Standard Deviation of a portfolio of 2 Assets

***Std dev = ((w1^2)(sd1)^2) + (W2^2 sd2^2) + (2*w1*w2*sd1*sd2*correlation ) ) ^ ½***

= ((1.30^2)(0.2193)^2) + (-.30^2 0.16^2) + (2*1.30*-.30*0.2193*.16* 0.64 ) ) ^ ½

=25.70 %

	Asset	Exp return	Std dev
	A	0.00%	21.93%
	B	0.00%	16.00%
	Correlation	0.64
Portfolio	Asset 1	Asset 2	Std Dev	Exp Return
1	130%	-30%	25.70%	0.00%

SO the Standard deviation of the portfolio is 25.70 %