The standard deviation of a two-stock portfolio generally equals the value-weighted average of the standard deviations of the two stocks.

Question

Quizplus · Accepted Answer

The standard deviation of a two-stock portfolio is generally not simply the value-weighted average of the standard deviations of the two stocks. The correlation between the two stocks also plays a significant role in determining the portfolio's standard deviation. The formula for calculating the standard deviation of a two-stock portfolio is:

σp = sqrt(w1^2σ1^2 + w2^2σ2^2 + 2w1w2σ1σ2ρ)

where σp = standard deviation of the portfolio, w1 and w2 = weights of stocks 1 and 2 in the portfolio, σ1 and σ2 = standard deviations of stocks 1 and 2, and ρ = correlation between the two stocks.

The Standard Deviation of a Two-Stock Portfolio Generally Equals the Value-Weighted