A college student owns two securities: Apple and Coca- Cola. Apple has an expected return of 15%, with a standard deviation of those returns being 11%. Coca-Cola has an expected return of 12% and a standard deviation of 7%. The correlation of returns between Apple and Coca-Cola is 0.81. If the portfolio consist of $6,000 in Coca-Cola and $4,000 in Apple, what is the expected standard deviation of portfolio returns?
A) 8.18%
B) 13.20%
C) 8.60%
D) 9.71%

Question

Quizplus · Accepted Answer

The correct answer is A.The expected return of the portfolio is:(0.6 * 0.12) + (0.4 * 0.15) = 0.132The variance of the portfolio is:(0.6^2 * 0.07^2) + (0.4^2 * 0.11^2) + 2 * 0.6 * 0.4 * 0.81 * 0.07 * 0.11 = 0.0070The standard deviation of the portfolio is:sqrt(0.0070) = 0.0836Therefore, the expected standard deviation of portfolio returns is 8.36%.

A College Student Owns Two Securities: Apple and Coca- Cola