The volatility of Woolworth's share price is 30% and that of Reckon's shares is 30%. When I hold both shares in my portfolio with an equal amount in each, and the returns have a correlation of minus 1, the overall volatility of returns of the portfolio is

Question

Quizplus · Accepted Answer

The overall volatility of returns of the portfolio is calculated using the formula:

Portfolio Volatility = √(w1^2 x σ1^2 + w2^2 x σ2^2 + 2w1w2σ1σ2ρ12)

where w1 and w2 are the weights of Woolworth and Reckon shares in the portfolio, σ1 and σ2 are the standard deviations of their returns, and ρ12 is the correlation coefficient between their returns.

Given that the weights are equal and the correlation coefficient is -1, the formula simplifies to:

Portfolio Volatility = √(0.5^2 x 0.3^2 + 0.5^2 x 0.3^2 - 2 x 0.5 x 0.5 x 0.3 x 0.3 x 1)

= √(0.045 - 0.045)

= √0

= 0

Therefore, the overall volatility of returns of the portfolio is zero.

The Volatility of Woolworth's Share Price Is 30% and That