A portfolio has 50% of its value in ASX shares and the rest in Woodside Petroleum (WPL). The volatilities of ASX and WPL are 39% and 35%, respectively, and the correlation between ASX and WPL is 0. What is the standard deviation of the portfolio?

Question

Quizplus · Accepted Answer

The formula for calculating the portfolio standard deviation is:
σ portfolio = √(w1^2 x σ1^2 + w2^2 x σ2^2 + 2w1w2σ1σ2 x ρ)
Where:
w1 = weight of ASX shares = 50%
w2 = weight of WPL = 50%
σ1 = volatility of ASX = 39%
σ2 = volatility of WPL = 35%
ρ = correlation between ASX and WPL = 0

Substituting the values in the formula, we get:
σ portfolio = √(0.5^2 x 0.39^2 + 0.5^2 x 0.35^2 + 2 x 0.5 x 0.5 x 0.39 x 0.35 x 0) = 0.262 or 26.2%

Therefore, the answer is C.

A Portfolio Has 50% of Its Value in ASX Shares