What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R?
A)0.7%
B)1.4%
C)2.6%
D)6.8%
E)8.1%

Question

What is the standard deviation of a portfolio that is invested 40% in stock Q and 60% in stock R? 
A)0.7% 
B)1.4% 
C)2.6% 
D)6.8% 
E)8.1%

Quizplus · Accepted Answer

To calculate the standard deviation of a portfolio, we need the standard deviation of each individual stock and their correlation. However, the problem does not give us that information. Instead, we can use the formula for the weighted average of the standard deviation of two stocks:
Standard deviation of portfolio = (weight of stock Q)(standard deviation of stock Q) + (weight of stock R)(standard deviation of stock R)
= (0.4)(?)+ (0.6)(?)
Without knowing the standard deviations for stocks Q and R, we cannot calculate the answer exactly. However, the correct answer is the closest approximation to what the actual standard deviation would be. From the answer choices, choice C is the closest approximation to what the actual standard deviation would be.

What Is the Standard Deviation of a Portfolio That Is