Volusia, plc is a UK-based exporting firm that expects to receive payments denominated in both euros and Canadian dollars in one month. Based on today's spot rates, the pound value of the funds to be received is estimated at £500,000 for the euros and £300,000 for the Canadian dollars. Based on data for the last fifty months, Volusia estimates the standard deviation of monthly percentage changes to be 8 percent for the euro and 3 percent for the Canadian dollar. The correlation coefficient between the euro and the Canadian dollar is 0.30. What is the portfolio standard deviation?

Question

Quizplus · Accepted Answer

The portfolio standard deviation can be calculated using the formula for the standard deviation of a two-asset portfolio: √[(w₁σ₁)² + (w₂σ₂)² + 2w₁w₂σ₁σ₂ρ], where w₁ and w₂ are the weights of the assets, σ₁ and σ₂ are the standard deviations, and ρ is the correlation coefficient. Here, w₁ = 500,000/800,000 = 0.625, w₂ = 300,000/800,000 = 0.375, σ₁ = 8%, σ₂ = 3%, and ρ = 0.30. Plugging these values into the formula gives a portfolio standard deviation of approximately 5.44%.

Volusia, Plc Is a UK-Based Exporting Firm That Expects to Receive