Assume there is a fixed exchange rate between the Canadian and U. S. dollar. The expected return and standard deviation of return on the U. S. stock market are 18% and 15%, respectively. The expected return and standard deviation on the Canadian stock market are 13% and 20%, respectively. The covariance of returns between the U. S. and Canadian stock markets is 1.5%.
-If you invested 50% of your money in the Canadian stock market and 50% in the U.S.stock market,the standard deviation of return of your portfolio would be __________.

Question

Quizplus · Accepted Answer

The standard deviation of a two-asset portfolio is calculated using the formula: √[(w1^2 * σ1^2) + (w2^2 * σ2^2) + (2 * w1 * w2 * Cov12)], where w1 and w2 are the weights of the assets, σ1 and σ2 are the standard deviations, and Cov12 is the covariance. Plugging in the values: √[(0.5^2 * 0.15^2) + (0.5^2 * 0.20^2) + (2 * 0.5 * 0.5 * 0.015)] = √[0.005625 + 0.01 + 0.0075] = √0.023125 = 0.1521 or 15.21%.

Assume There Is a Fixed Exchange Rate Between the Canadian