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You put 60% of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 26%
You put 60% of your money in a stock portfolio that has an expected return of 14% and a standard deviation of 26%. You put the rest of your money in a risky bond portfolio that has an expected return of 6% and a standard deviation of 11%. The stock and bond portfolios have a correlation of 0.36. What is the standard deviation of the resulting portfolio?
Expert Solution
Computation of Standard Deviation:
Expected Return = w1 * R1 + w2 * R2
= 60% * 14% + 40% * 6%
= 8.40% + 2.40%
= 10.80%
Standard Deviation = [(w1 * SD1)^2 + (w2 * SD2)^2 + (2 * w1 * w2 * SD1 * SD2 * corr12)]^(1/2)
= [(60% * 26%)^2 + (40% * 11%)^2 + (2 * 60% * 40% * 26% * 11% * 0.36)]^(1/2)
= [3.12%]^(1/2)
Standard Deviation = 17.67%
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