Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations:
-The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A)8%.
B)9%.
C)11%.
D)6%.

Question

Use the table for the question(s)below.
Consider the following expected returns,volatilities,and correlations: 
-The volatility of a portfolio that is equally invested in Duke Energy and Microsoft is closest to:
A)8%. 
B)9%. 
C)11%. 
D)6%.

Quizplus · Accepted Answer

The volatility of an equally weighted portfolio can be calculated using the formula:

Portfolio volatility = √(w1^2 x σ1^2 + w2^2 x σ2^2 + 2 x w1 x w2 x σ1 x σ2 x ρ)

where w1 and w2 are the weights of the two securities, σ1 and σ2 are their respective volatilities, and ρ is the correlation between them.

Plugging in the values from the table:

Portfolio volatility = √(0.5^2 x 0.13^2 + 0.5^2 x 0.21^2 + 2 x 0.5 x 0.5 x 0.23 x 0.44)

Portfolio volatility = √(0.0085 + 0.0232 + 0.0202) = 0.121 or 12.1%

Therefore, the closest option is B) 9%.

Use the Table for the Question(s)below