The expected returns for ABC Company and XYZ Company are 12.0% and 9.0%, respectively.The standard deviation is 20.0% for ABC and 15.0% for XYZ.What is the portfolio standard deviation if one-third of the portfolio is in ABC and the two securities have perfect positive correlation?
A)16.67%
B)10.00%
C)2.78%
D)1.00%

Question

Quizplus · Accepted Answer

When two securities have perfect positive correlation (correlation coefficient = 1), the portfolio standard deviation can be calculated using the weighted standard deviations of the individual securities. For a portfolio with one-third in ABC and two-thirds in XYZ, the calculation is as follows: Portfolio Standard Deviation = sqrt[(1/3)^2 * (20%)^2 + (2/3)^2 * (15%)^2 + 2 * (1/3) * (2/3) * 20% * 15% * 1] = 16.67%.

The Expected Returns for ABC Company and XYZ Company Are